NewMarket Corp (NEU) 2011 Q1 法說會逐字稿

Greetings and welcome to the NewMarket Corporation first quarter 2011 financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Fiorenza, Vice President, NewMarket Corporation. Thank you. You may begin.

Thank you very much and thanks to everyone for joining us on this afternoon conference call. With me today is Teddy Gottwald, our CEO. And we'll follow our normal format, after the opening comments we'll take your questions. As a reminder, some of the comments we will make today are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We believe we base our statements on a 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 2010 10-K.

As you saw in our release last night, net income for the quarter increased to $49.6 million, or $3.57 a share, an improvement of 18% over net income for the first quarter of last year of $42.1 million. Last year's performance was $2.78 a share. The percentage increase in earnings per share for the quarter was 28%, reflecting the additional benefit of the Company's stock repurchasing activities. Our business continues to generate strong cash flow and our operating flexibility remains strong. Our consolidated revenue for the first three months was $508 million, representing an increase of approximately 29% from the 2010 level of $395 million. Petroleum additives net sales for the quarter was $503 million, which is an increase of $113 million or approximately 29% from $390 million for the first three months of 2010. The increase in sales reflects higher total product shipments of 17%, which includes the benefit of Polartech shipments for the full three months of this year. The increase in shipments was the predominant factor in the higher net sales between the two three-month periods and was across all product lines. Selling prices were also favorable when comparing the three months periods. The impact of foreign exchange was essentially flat with some currency strengthening and others weakening. The approximate component of the change in revenue were $83 million from increased shipments and $30 million from changes in selling prices. Both numbers include the impact of changes in mix.

If you compare the first quarter of this year with the last quarter of last year, revenue was up about 12% on shipment increases of 10%. Those increases were widespread amongst regions and businesses. I believe this comparison may be more meaningful. It takes out the effect of the acquisition. This increase of 10% sequentially was in line with our expectations and is in line with what we had expected to happen for the quarter. We are asked often about our goal for the year on volumes. Our goal for the year is certainly more than the industry average that we talk about of 2%, but it's unlikely it could be as high as this 10% increase that I just discussed.

The petroleum additives operation had excellent performance in the first quarter, with operating profit improving to $80.6 million. This $10 million improvement is 14% higher than last year's first quarter of $70.4 million, and is the second highest quarterly profit on record. We are very pleased with this result as the first quarter is typically one of the softer quarters of the year. This strong performance is the result of our continued efforts and commitment to supply our customers with first class solutions to their products -- to their problems. We do this by providing differentiating top quality products and innovative technology driven by marketing solutions as evidenced by our continued investment in research and development and in other support areas. The increase in shipments just discussed was a major positive factor in improved profitability. Offsetting this benefit was additional spending in our supply chain capabilities and in our functions to support our business initiatives. In this quarter, SG&A increased approximately $7.5 million, which was primarily the result of certain growth related costs, acquisition impacts, higher personnel related costs, and higher professional fees. R&D increased about $3.4 million. We continue to invest in SG&A and R&D to support our customers' programs. This allows us to develop the technology required to remain a leader in this industry.

Our business continues to experience the effect of increasing raw material costs on our operations. We expect to recover those increased costs by increasing prices. There have been no changes to the overall industry dynamics and we remain confident that we will be successful with that action. Operating profit and revenue for the real estate development segment were the same for both three-month periods so there's not much to discuss there. Interest and financing expenses was $4.6 million, compared to $3.9 million for the first three months of 2010. And this increase was related primarily to higher outstanding averages on our revolving credit facility. Other expense for the quarter was $67,000, while three months last year was $2.3 million. This year's amount includes a gain of about $900,000 on the derivative we hold, and that gain was offset by about $1 million of expense related to the modification we requested and obtained in January from the holders of our senior notes. The other expense of $2.3 million last year was primarily the loss on that derivative. The effective tax rate for this year's first three quarters was 34.4% compared to 32.6% last year. We believe 32% to 33% is a good range to use for the total year taxes.

Cash was essentially the same when comparing March to December. We wound up the quarter with $37 million more drawn on the revolver than we did at year end. The components of the sources and uses are detailed on the schedule that was included in last night's release -- for the major components, I should say. We generated cash from operating activities before working capital changes of $60 million this quarter. This can be compared to $53.7 million for the same quarter last year. Included in the $60 million is $10.2 million of depreciation and amortization. Among the uses of cash for the quarter was a use of $45.6 million to fund working capital increases. This number includes higher receivables and inventories and other ups and downs and other components of working capital. As we have seen before in a volume growth environment, with rising raw material, our working capital behaves in this fashion. The increase in receivables is primarily due to higher sales level and the increase in inventories reflect increased quantities at certain locations to respond to demand for our products and higher priced product. We spent $24.2 million on capital expenditures in the quarter which included about a $14 million to purchase our office and R&D facility in Bracknell, England. We estimate that our total capital spending during this year will be in the $50 million to $55 million range. The last major use of cash in the quarter was to pay $27.4 million for stock we repurchased. There were other minor sources and uses and those will be detailed in the 10-Q that we expect to file next week.

The status of our revolver at the end of the quarter was that we had $41 million drawn on the facility and $5.1 million of letter of credits written, which resulted in $254 million of available borrowing capacity. We had total debt of $258 million at the end of the quarter. Our leverage as measured by the debt to EBITDA ratio was below 1. We continue to operate with a very low debt ratio. I'm happy to let you know that our employees in Japan escaped the terrible earthquake and tsunami without major loss or damage. All of our employees are safe but not without serious disruption to the items we take for granted like good public transportation and a stable electricity supply. Our office and R&D facilities are operational. We do not expect a significant impact to our business as a result of that tragedy.

You also saw yesterday that our Board was pleased that we were able to increase our dividend 36% over its previous level. Based on the success of our business and the strength of our cash flow, we are comfortable that this increased dividend payout will allow us to continue to grow, to reinvest in our business, pursue acquisitions, and/or repurchase stock. It remains important to us that we reward our long-term shareholders by paying a dividend competitive with our specialty chemical peers. We're very pleased with the performance of our business during this quarter. Our businesses are running well, demand is strong, and our employees continue to focus on providing the goods and services our customers expect from NewMarket. The normal business conditions continue to keep our teams busy but we are confident that we will meet those challenges and handle them successfully. The industry dynamics remain unchanged during the quarter and we see no change in the near future. We look forward to a very successful and profitable 2011.

That concludes my planned remarks. I'd like to open the lines for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Mike Sison with Keybanc. Please go ahead with your question.

Good morning, guys. Great start to the year.

Thank you.

In terms of the volume growth you had in the first quarter, was there any pre-buys or is that sort of a growth rate year-on-year that you feel comfortable with continuing? It doesn't seem like that's a level that the industry tends to grow at, I suppose.

Yes, we totally agree with you. We often talk about one or two, let's just say two for this conversation, and that's obviously over big blocks of time, measured more annually than quarterly. We don't honestly know if there wasn't some pre-buying in that 10% sequential improvement. But we were expecting good things out of our business in the first quarter and they were delivered.

And so for the full year '11 versus '10, certainly going to be better than the industry average. Could you sort of give us a degree? Is it going to be in that same level or just sort of a little bit back to normal as the year unfolds?

Second, third quarters tend to be better than first quarter. I don't see anything changing that. So, I don't have a number but I expect high single digits wouldn't be a surprising number on the volume.

Okay. And in the first quarter were you squeezed by raw materials at all or is there some catch-up, do you still need to see with your pricing?

Yes, there was some impact on the profitability in the first quarter compared to the fourth quarter because raw materials are going up.

And does that squeeze get bigger in the second then as pricing catches up, it sort of shrinks in the third and the fourth?

Mike, it's really hard for me to guess because I don't know what raws are going to do. But I'd expect some catch up in the second and then more in the third, fourth, if everything stopped moving.

Okay. Great. Thank you.

You're welcome.

Thank you. The next question is from Saul Ludwig with Northcoast Markets. Please go ahead with your question.

Good afternoon, David.

Good afternoon, Saul.

Okay. On the increases in SG&A and R&D, which in the first quarter were I think somewhat greater than what we thought the pace might be, what was unusual there and what should we think about for the balance of the year?

Yes, I don't particularly see R&D as anything unusual or out of line with what we expected. As a matter of fact, it's not. S&A increased somewhat but, Saul, the fact is we are spending more money in S&A. We're spending more in supporting our businesses, more sales offices, more faces to the customers. The total for the corporation, as you can see in the press release, was $38 million for this quarter and I think that's a fair number to be thinking about.

I mean, $38 million is up 25%, approximately, from where it was last year. And I think in any kind of recession or in the past we talk about the rate of growth of SG&A, a number like 25% never has emerged. Are we at a new pace because of these investments, which I think you're paying off as evidenced by your volume growth, but should we be thinking sort of north of 20% growth in SG&A for the balance of the year?

No, I don't think so. You're probably looking at the 38 compared to the 30, 1Q to 1Q.

That's right.

And the 1Q, remember, didn't have Polartech in it which brought on a step function of more S&A. I tend to look at the average of two, three and four quarters and compare that to the first quarter. And I don't see the kind of increase you're talking about. That's what I'm saying you could expect going --.

The $38 million run rate is closer to reality?

That's correct.

And $24 million run rate on R&D, closer to reality?

Yes, and that's pretty much the average of two, three and four Q, so yes.

Back to the question Mike asked, we just had a pretty sizable base oil increase a week or so ago. Have you guys gone out with your pricing to offset that or is that yet ahead? And if you haven't done it, wouldn't you continue to have this lag in covering raw material costs with pricing?

Saul, it's Teddy. I'll answer that. Where we are in the cycle is just hard to say. There's been a steady stream of base oil price increases and our costs are certainly based on more than just base oil. We're seeing increases in a lot of areas. We don't see any changes to the industry dynamics and fully expect that in the normal period of time from when we see the cost increases, we'll be able to catch up.

And just a final question, back on the volume. When you guys were probably doing your planning for this year at the end of last year, I doubt that you would have expected the year to surge up with 17% volume growth. Was that all -- was it spread equally globally? Was there any place that it was particularly unusually strong that distorted the total and, Teddy, how do you think about that level of volume growth? As we think about the balance of the year, I mean, is this sort of unusual and surprising?

Well, keep in mind that we're thinking more in sequential terms of up 10% over the fourth quarter on volume. It was very widespread. It was across many of the product lines and most of the regions and we feel good about it. It's about where we thought it would be. And we're hoping for a good year.

Okay. Great. Thank you very much.

You're welcome.

Thank you.

The next question is from Dmitry Silversteyn with Longbow. Please go ahead with your question.

Good afternoon. Just wanted to confirm what the Polartech contribution was year-over-year to the 17% volume growth. It looks like it was about 5%. Am I calculating that correctly?

That's about right.

Okay. And then secondly, in the -- usually everything outside of volume gets pulled together into price mix and currency. Can you give us an idea of whether currency was a big positive for you in the quarter?

No, currency was a nonevent in the quarter.

Do you expect -- given that we're at a $1.45 here to a Euro, do you expect currency to become a contributor to both revenue and top line -- I'm sorry, in margins or profits.

Yes, if it stays at $1.45 it should. We benefit when those conditions exist.

Okay. All right, that's all the questions I had. Thank you.

You're welcome.

The next question is from Robert Felice with J. Goldman and Company. Please go ahead with your question.

Hi, guys. Most of my questions have been answered. Just a couple more here. I guess first, I'm just wondering how we should think about the sequential movement in your margins from 1Q to 2Q. It sounds like on an absolute basis you'd expect second quarter profitability to improve off first quarter, just seeing as it's typically a bigger quarter than the first quarter. As we factor in the rise in raws and pricing flowing through, do you anticipate that you'll be able to actually hold margins sequentially or improve margin?

That really is a tough question, Rob. I would expect we'd be able to hold them. Whether they would go up, I don't know. I don't know when all the raw materials are going to hit. I don't know when the price increases are going to hit. There's just too many moving parts. I can see further out clearer than I can just one quarter.

Okay. But it sounds like one way or another you're not expecting very big movement?

That's correct.

Okay. And then I guess just lastly, your other publicly traded competitor, Lubrizol, announced it's being acquired by Berkshire in a transaction that I guess values it at about 7.4 times trailing 12 month EBITDA, which puts a pretty big marker in the ground as to what one large player thinks a premium lubricant additive asset is worth in a private market transaction. So, I guess I wanted to get your thoughts as to whether that kind of multiple or valuation marker is what we should think of that as a proxy for NewMarket or, for that matter, for any other asset in the space.

Are you asking us what we think that the stock is worth or what the Company's worth? I honestly don't spend a lot of time thinking about that question. I think about how we can grow the business and I see a bright future ahead and I think we can continue to grow what we've got. And I see the Berkshire Hathaway acquisition of Lubrizol being pretty much a nonevent in the marketplace for us. It's essentially business as usual.

Okay. Fair enough.

(Operator Instructions). I'm showing no further questions in queue. I'd like to turn the call back over to management.

Well, thanks, everyone, for joining us on this day before our day off and have a good Easter holiday. Bye-bye.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.