NewMarket Corp (NEU) 2011 Q2 法說會逐字稿

Greetings and welcome to the NewMarket Corporation's Second-Quarter 2011 Financial Results Conference Call. (Operator Instructions) It is now my pleasure to introduce your host, David Fiorenza, Vice President and Treasurer for NewMarket Corporation. Thank you, Mr. Fiorenza, you may begin.

Thank you for joining us to discuss our second-quarter results. With me today is our CEO, Teddy Gottwald. 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 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. We filed our 10-Q this morning, and it contains more details on all aspects of the quarter.

I'm going to focus today on those items that I consider of main importance. Net income for the quarter improved to $52.3 million or $3.77 per share, which is a 31% improvement over last year. This brings the income for the first half to $101.8 million, or $7.34 a share, an improvement of 24% compared to the first half of last year. The percentage increase in the improvement in earnings per share for the second quarter and first half was 40% and 34%. These percentages are higher than the net income percentages because of our stock repurchase activities.

The earnings release posted yesterday breaks out the impact of the interest rate swap which is becoming a regular feature of our earnings. Petroleum additives net sales for the quarter of $573 million represented an increase of $108 million or about 23% from last year. The increase in sales reflects higher total product shipments of 11% and was across all product lines. Each of shipments in pricing/mix were up about $47 million or 10 percentage points with the remainder of the improvement of $13 million attributable to foreign exchange.

Unlike the first quarter, this comparison is not impacted by our acquisition activities. Petroleum additives operating profit increased $9 million in the quarterly comparison. The improvement was driven by the improvements in shipments and currency impacts somewhat offset by margin compression due to increased raw material prices, as well as planned additional spending in S&A and R&D.

The improvement we have seen in volume is widely spread among our product offerings, our regions, and our customer base. We attribute the growth in volume to our customer intimacy strategy. We start with the premise that it is our mission to help our customers succeed in their marketplace. We work closely with our customers to assess market trends and end user needs, and then develop new solutions that will give our customers the competitive advantage.

This changes the discussion from one of price and cost to one of value or top line growth as well as improved profitability. We believe our customers are happy with this approach, that we make a difference to them. We have also been investing a lot of money and resources to make a step function improvement in our capabilities in the fastest growing region, Asia. Local support, local supply in products intended for that market also make a difference in our success.

The effective tax rate for the quarter was 31.6% compared to 34% last year. The primary reason for the lower effective rate this year is the inclusion of the R&D credit which was not available until the end of 2000. We continue to believe that 33% is a good planning number for our rate. Cash was $61 million at quarters end. While that is an increase of $11 million from the last quarter, our debt also increased $7 million.

You can read the cash flow statement in the filing or in the queue, but the summary is that our business continues to generate significant cash, but the business is also consuming a lot of cash in working capital. For the first 6 months, working capital requirements increased $85 million to support our business growth as well as a consequence of escalating raw material prices which ultimately impacts both receivables and inventories.

We also spent $35 million in the first half for capital expenditures in support of our businesses. We expect the total number for the year on that line item to be in the $55 million range. During the quarter we repurchased 26,500 shares for about $4 million. That leaves about $126 million remaining on our board authorization.

You might also notice a low cash number in our statements for dividends. Our payment was due on July 1 which was a banking day. That means we made the remainder of the dividend payment on the first day of the third quarter. For the year ending June, we had EBITDA of $346 million and debt at $265 million which gives a 0.8 debt to EBITDA statistic. We continue to operate with very low leverage. The quarter's ending availability on our revolving line of credit was $246 million.

We are pleased with the performance of our business during the first half of the year. Our businesses are running well, demand has been strong, and our employees continue to focus on providing the goods and services that our customers expect from NewMarket. The industry dynamics remain unchanged during the first half, and we see no change in the near-term.

We have enjoyed good volume growth in the first 6 months, and expect the annual volume growth year on year to be in the high single digits. We continue to look forward to a successful and profitable 2011. We continue to plan forward, particularly with respect to capitalizing on opportunities to use the cash we generate to grow our business and reward our shareholders. This is no change from past communications on this topic.

Our primary focus in the acquisition area remains 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 that acquisition materializes, we will continue to evaluate all alternative uses of cash to enhance shareholder value, including stock repurchases and dividends. That ends my prepared remarks. Doug, can we open the line for questions?

Thank you. ( Operator Instructions ) Our first question comes from the line of Peter Cozzone from KeyBanc Capital Markets.

Good afternoon. As we look at the back half of the year, can you walk us through the puts and takes on a seasonal basis. It certainly seems in 3Q, it tends to be a little flat to maybe slightly better than 2Q, and then 4Q is weaker. Can you walk us through the puts and takes there, with seasonality in the business?

Yes, the normal pattern, if there is such a thing of our business, the 2 halves roughly -- the second and third quarter tend to be the stronger of the year. And the first and fourth tend to be the weaker. Who knows what this year will be, but that is the normal way this business tends to work.

Okay, and then on the gross margin front, clearly you are working against some significant raw material increases in 2Q. Given we have seen some stabilization here on the raw materials front, is there any reason that you would not be able to improve margins heading into the back half of the year as pricing continues to catch up?

I think the way we look at that is, the industry dynamics have not changed any, so we have a pattern or a dynamic that we are able to recover those increases in the marketplace. That is our intention, and who knows what raw materials are going to do. Every day, they go up and down. There is some sign that they are flattening out.

Okay, then a quick one on the SG&A and R&D front. We have seen 2Q as pretty much in line with 1Q on an absolute dollar basis, I am wondering if this is the run rate for the rest of the year, or how can we think about that?

Yes, if you look at the first half of the year for S&A and R&D, that is a real good barometer for what the year is going to wind up.

Thank you very much.

You are welcome.

Saul Ludwig, Northcoast Research Holdings.

Good afternoon Mr. David.

Hello Saul.

Is Teddy there too?

Yes, sir.

Thank you. Your volume has just been terrific, when we look at things that would influence your volume, miles driven, etc, propensity of people to change their oil, those all were heading in more of a negative direction in the second quarter. Why do you think your volume is as good as it was? That is kudos to you, but why do you think that was the case?

Saul, I will answer that. Part of it certainly is our team continues to execute well in the marketplace. I would not put too much emphasis on any correlation between miles driven or any of the factors you mentioned in any quarter. Those are longer-term trends, and they don't really impact what we see in a quarter too much.

We are seeing near-term -- it is becoming a little harder for us to really forecast short-term demand. We have some thoughts on what could be driving that. In a rising costs environment, we may be seeing some pre-buying periodically. In the early second quarter sometimes we are seeing some hurricane planning and stocks being built up. In general, when we look out over the longer period, we don't see any significant change in our view on industry demand growing in the 1% to 2% range worldwide.

Got to be something that you are doing that is helping you, in other words, you mentioned the hurricane season, that would not have any bearing on the year-over-year because last year in the second quarter you would have had that same influence. As I recall, particularly with this GF5 and the [dexose] you were able to accomplish certain technical levels of achievement that may have been superior to that of the competition. Do you think this market share has been a factor in your very fine volume performance, and are there legs to that?

I think that is probably part of the answer, and as I have said at the beginning, our success in executing in the marketplace has certainly driven our volume.

So to use your high single-digit for the year, certainly implies a lower rate of volume growth at the back end of the year and, as difficult as it is to forecast and we appreciate that and whatever you say about the future who knows -- it may or may not come to pass, but we ask sort of what your best shot is. Why would you think your rate of volume growth is going to moderate in the back end of the year from where it was in the first half of the year?

Saul, this is David. It is just the unknown, we don't have any customers that are leaving us -- there is a lot of uncertainty in the global economy that we play into. Yes, if we get high single digits, the second half won't grow as fast as the first half on a comp basis but it will still be a heck of a second half. That is the long and the short of it.

You also mentioned that you are trying to grow your business in Asia. Maybe if we look at your revenues, and we look at the first half of 2010 and the first half of 2011, has the percentage of your sales in Asia become a bigger percentage of your total and maybe you could share some of those numbers with us?

We don't break it out, so we are not going to share the revenue. It is growing, but for us to post these kinds of growth numbers, all regions have to participate, that is what I said in my opening remarks. This is widespread, yes -- Asia is growing. Yes, we are working hard to grow that market. But it is a widespread success.

Finally, if you look at what your average raw material cost was in the first quarter, and what it was in the second, what was the delta percentage change from first quarter to second quarter and let's say your average raw material cost?

I don't have that with me. I don't have it with me.

Okay. Great, thank you very much guys. Good quarter.

Thank you.

Your next question comes from the line of Todd Vencil of Davenport & Co. Please proceed with your question.

Good afternoon, Teddy. Good afternoon David.

Hello.

If I look at your operating margin, petroleum additives, it is down a little bit sequentially and year-over-year. I think there is a couple of things that you have talked about that can certainly have influenced that, one of which is the cost push that you are constantly pushing price through to catch up with and the other is the effect of passing through lots of raw material costs in the denominator on revenues gets big and maybe you are not keeping up in the percentage side. Can you talk about if you look at a 14.9% margin in this quarter, how much of it was the fact that you just hadn't quite caught up the raws yet versus how much of it may have been you were caught up but that implies a lower percentage?

I can't dissect it, Todd. What I can say is we believe this business that we are managing, this portfolio and this mix we have now is a mid high -- 16, 17, 18 -- instead of trying to use adjectives -- kind of business. And no one quarter we will ever hit that number. That is where we are, always chasing raw materials. Or raw materials are chasing us. How much of the profit compression was due to that, it's just not possible for me to calculate.

Got it. Based on that comment, I would take it that if you look at this quarter's results it does reflect some catching up yet to do with price on cost, is that fair?

That is correct.

That is what I have. Thank you.

Thank you.

Our next question comes from the line of Dmitry Silversteyn from Longbow Research. Please proceed with your question.

Good afternoon, guys, and congratulations on another solid quarter.

Thank you.

The question that I have, you did not address the volume issue, which is not an issue, I would say mystery would be more likely. This is second quarter in a row where you are posting double-digit volume growth that are not reflective of your competitors or your customers or even your suppliers. So you obviously are doing something right, so congratulations on that.

The question that I have, following on the previous question, we had a basal price increase in April, another one in May, there's another one that went into effect July 1 or June 1, I forget, I think July 1. Where are you with your own price increase announcements and as you look at the latest $0.50 to gallon increase in base oil, will you have to go out into the market in the near future and try to recapture that or is your pricing patterns insensitive, if you will, to the increase announcements from your suppliers?

Dmitry, it is really not very meaningful to talk about where we are at any one point in time. I think the more relevant topic is, are there any changes in the dynamic of the market, and we don't see any changes. We are behind right now. We are catching up, and we do think that there is a good likelihood raw material costs will flatten out over the next handful of months, and we feel pretty good about our ability to recover the costs and where we stand.

Fair enough. The second question I have, an observation that I would like to hear your comment on. Your working capital keeps expanding, and I understand that a lot of that is inflationary raw material, and obviously sales numbers, but even if you look on the inventory turns on trailing 12 months to kind of take some of this out or days sales outstanding. They are creeping up, you are down -- inventory turns are down to almost 6 times from something like 8 to 10 times that you had a couple of years ago and your Days Sales Outstanding are creeping up on 57 days.

Can you talk about -- is this a change in geographic mix and you are getting into geographies where it takes longer to collect and where you have to carry higher inventory levels, or what is going on with your working capital, how we should think about either cash issues or cash generations, working capital in the rest of this year and into next year?

I will try to answer that for you. First off, receivables. We track receivables and Days Sales Outstanding, we tracked past dues. We are doing a great job on receivables, our past dues measured as number of days past due, have gone down. So any measurement that you might see has to do with geographic differences that it takes longer in one country than the other, we are very satisfied with that. Inventory, we have active programs going on demanding that inventory. We have chosen a manufacturing capability that is mainly centered in North America, which means that as our business expands in other parts of the world and before we can get more manufacturing in that part of the world you solve some of those issues with inventory.

So we see the same thing but don't underestimate how much of that is just the inflationary impacts of everything going up. We have to raise prices and receivables go up, and you see it there. We get raw material increases and our inventories go up, you see it there. As far as when does it stop? It lies in, when do we quit growing our business, which I never want to do, or when do raw materials slow down, which I can't guess. So, those are the variables we look at every quarter.

Thank you.

You're welcome.

Our next question comes from the line of Dan Orr, from BAM Capital. Please proceed with your question.

Hi, guys. How are you doing?

Very good.

Nice quarter. I don't want to belabor this point too much, but from the other industrial company that I have spoken with, and other chemical companies I have spoken with it seems like of late they have seen some fall off in demand. Still mostly positive demand in most cases, but still, the monthly progression has declined. Could you talk about in the last quarter what you have seen as the quarter progressed. Have you seen any change in demand or have the demand trends been relatively similar so you are just expecting the back half of the year to fall off?

We are seeing some weakness here in the recent term. But we are not ready to call it a trend.

Is there anything in particular that you would attribute that weakness to, or is it more just noise in your opinion?

We are not really sure, to be honest with you. We will just have to wait and see, but there is nothing specific that we would attribute it to.

Okay, and with the weakness you have seen, if it does persist, do you worry about -- the value proposition will obviously be there for your customers, but do you worry about your ability to push through raws, if demand lightens up, or if the industry dynamic is such that you should still be able to push through prices even in the weakening demand environment you see?

I have no reason to think that we are looking at a weakening demand environment in our business. I think the industry dynamics are pretty much unchanged, I think we are still seeing growth in our market and I just really don't have any reason to believe that isn't going to be the case.

Perfect. Thanks a lot guys, nice quarter.

Thank you.

(Operator Instructions) Our next question is a follow up question from the line of Saul Ludwig. Please proceed with your question.

The 11% volume increase that you gave us was for the whole petroleum additives segment. Could you segment that and what was the increase for lube additives versus your fuel business?

No, Saul. But you know, the industry is 75% lubes and 25% fuel, so your 25% leg can not drive up that much so it has to be a lot of lubes and some of fuel.

Was fuel up at all? Above single digit?

We were up all product lines.

But less than lubes, got it. Thank you.

You're welcome.

There are no further questions in the queue, I would like to hand the call back over to management for closing comments.

Thanks, everyone, for joining and we will talk to you next quarter. Have a good day. Good bye.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.