NewMarket Corp (NEU) 2011 Q4 法說會逐字稿

Greetings, and welcome to the NewMarket Corporation’s fourth quarter 2011 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. (Operating Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Fiorenza. Thank you. Mr. Fiorenza, you may begin.

Thanks, Kevin. And thanks to each of you for joining us to discuss fourth quarter and year-end performance. With me today is our CEO, Teddy Gottwald. I have a few planned comments, after which we'll open the lines for 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 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 plan to file our 2011 10-K in late February. That document will contain significant details on the operations of our Company, and it is the result of a lot of work by our team to publish it, from tagging data from XBRL to mind-numbing details required in the footnotes. Thanks to each of you for doing that. Please take the time to read through it to get a better understanding of our performance. I plan to cover the quarter first and then move on to the year.

Net income for the fourth quarter was $33.7 million or $2.51 a share compared to net income of $49.4 million or $3.47 per share for the same period last year. The interest rate swap that we mark-to-market had an adverse impact of $0.37 per share in the quarterly comparison. Without the swap, our earnings per share were $2.57 compared to $3.16 for last year's fourth quarter. Our net income without the swap was $34.5 million compared to $45 million last year.

Petroleum additives net sales for the quarter increased to $499 million, which is an increase of about 10% over last year's performance, while tons shipped were actually 2% lower. We believe that the decline in shipments in the fourth quarter include the traditional volume pattern, the effect of reduction of inventory levels by some of our customers, as well as some softness in demand influenced by economic issues around the world, predominantly Western Europe. It is difficult to know the exact buying behavior of many of our customers.

We ended 2011 with some announced reductions in base oil. In the past, we have seen some hesitancy from our customers to purchase additives when base oil is dropping, as they manage their inventories for the possibility of future drops in that very important raw material. This was the pattern that we saw at the end of 2008, although this drop is nowhere the same severity.

As in 2008, the drop within the lubricant additives area as our customers hold a relatively small amount of fuels inventory. The sales increase was due to price and currency with lower shipments dragging it down somewhat. During the quarter, petroleum additives posted an operating profit of $59.3 million compared to $72 million in the fourth quarter of last year. I'd like to spend a little time explaining the things we see as a management team when we look at that quarterly results.

First off, the volume was lower than we were anticipating. The first question we ask ourselves when this happens centers around our customers and their satisfaction with us. As a matter of fact, we ask that question of ourselves every day. We know we did not lose any significant business during the quarter. So, we conclude the volume drop is one of several things. It could be inventory adjustments by them, our customers, economic slowdown, which affects their demand or combination of those two or other factors that may influence their buying decisions. These lower volumes led us to run our plants at lower rates in order to better manage our overall inventory levels.

Running at that lower rate results in a higher than normal level of unabsorbed plant costs going directly to the P&L in the quarter. On top of all of that, we took a charge for our contingency position we had on a certain raw material and continued on our planned increased spending pace in R&D and S&A to support our customers. We generally do not go into so much detail about one-time items because every quarter has its shares of ups and downs in running our global business.

I mentioned these this quarter because they total in the $8 million to $10 million range, and not the normal plus or minus $2 million that may characterize a more normal quarter. All in all, our petroleum additives business is running well and we are pleased with this performance. The quarter also included a couple of million dollars at the corporate S&A level that occur from time to time. We contributed an extra million dollars to a charitable trust during the quarter, and had the bittersweet event of charging our P&L with an extra million dollars associated with marking certain obligations to market that are based on our stock's performance. We did not repurchase any stock in the fourth quarter and ended the year with 13.4 million shares outstanding.

I'm now going to move on to the year. It was an outstanding year for our Company virtually across every variable we try. Net income for the year increased to $206.9 million or $15.09 per share compared to net income of $177.1 million or $12.09 a share last year, 2010. The earnings for the current year and prior-year periods include the impact from an interest rate swap, while the current year also includes the gain on a legal settlement.

You'll notice that there's a table on the face of the press release, which details the impact of those two items. If you look at the last row, the one that excludes the legal settlement and swap, you can see that net income in 2011 was $193.7 million versus $183.4 million in 2010. That represents an increase of 5.6%. A comparable increase in earnings per share was 12.8%, which included the impact of our buyback activities during 2011.

Net sales for the year totaled $2.149 billion. This was the first time we exceeded the $2 billion mark. Revenue for 2011 was 19.6% higher than 2010 and included the benefit of a 6% improvement in tons shipped. We had records in revenue, volume, profits and safety performance. All of our regions saw improved profit performance as did most of our product lines. We are proud of that performance and know it is the result of a global team effort. We continue to invest in our R&D programs as we believe that is the key to our continued long-term success.

We spent $105 million in R&D in 2011 compared to $91 million in 2010. This was a 16% increase in purposeful spending. During the year, we expanded our presence in the Asia-Pacific region with supplier positions, additional sales coverage and additional R&D support. Our team performed well, served our customers with distinction and are prepared to match that performance in 2012.

There are few tables attached to the press release and I'll cover just a couple of items. Let's take a look at the balance sheet first. The balance sheet has a lot of moving parts and the 10-K is the source to gain a more complete understanding of what's driving each one of those.

For the quarter, we reduced total debt by $32 million, as our business generated cash in excess of our needs to run our business, manage our capital campaign and pay our dividend of $0.75 per share. On the cash flow, most of the cash flow statement for the year is a basic continuation of the pattern we posted for the first three quarters.

The only item of note for the fourth quarter is that we had a return of about $26 million in the working capital section. This was primarily related to accounts receivable, which were down a fair amount from the end of the third quarter since sales were down on a sequential basis. On an annual basis, working capital continues to increase to support our business without having $62 million more in that area than we did at the beginning of the year.

Our business continues to generate significant cash as evidenced by our EBITDA, which was $343 million as adjusted compared to $325 million from last year on the same basis. The as-adjusted comment I made removes the benefit of the one-time legal settlement. These numbers can be found on the non-GAAP reconciliation on the last page of the press release.

With total debt ending at $243.6 million, we ended the year with a debt-to-EBITDA ratio of 0.7. We continue to operate with very low debt leverage, which affords us a lot of flexibility in executing our business plans and in capitalizing on opportunities as they may arise.

We began 2012 with a very positive view of our business and the customer-focused approach, we believe, has helped 2011 be a record setting year. We believe the fundamentals of how we run our business, the safety-first culture, customer-focused solutions, technology-driven product offerings, a world-class supply chain capability and a regional organization structure to better understand our customer needs will continue to pay dividends to all of our stakeholders.

We expect 2012 to be more profitable than 2011 as we project an increase in volume, revenue and net income. There has been no significant change in the positive fundamentals of our petroleum additives business. We do not consider the fourth quarter softness to be indicative of the year to come. We expect industry demand to continue to grow at about the 2% a year rate and we plan to exceed that rate. Our view on margins have not changed. When you look at our year's performance and you add back the one times, we exceeded 15% margin for the year. We believe the business should be able to continue to deliver in that range.

Over the past several years, we have made significant investments to expand our capabilities around the world. 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 service that our customers value and to expand our business and profit.

In summary, we expect the business practices that have produced the outstanding results of the past two years will continue in 2012. As our business continues to generate significant cash beyond what is needed for the expansion and growth for our business lines, we readily look at other ways to deploy that, including internal opportunity, both from a geographical and a product line point of view. We continue our efforts in investigating potential acquisitions as both the use of this cash and to generate shareholder value.

As we stated, our primary focus in the acquisition area remains the petroleum additives industry, as 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 in our balance sheet and we'll continue to evaluate all alternative use of that cash to enhance shareholder value, including stock repurchases and dividends.

That ends my prepared remarks. Kevin, can we open the lines for any questions?

Absolutely, sir. Thank you. (Operator Instructions) Todd Vencil, Sterne, Agee.

David, on the $8 million to $10 million of items that you mentioned you noted a write-down in the raw -- as far as [it is repositioned] certain raw materials, can you just -- can you give us a little color on -- a little more color on what that was and what else is in that $8 million to $10 million?

The inventory was about half of that and the other ones were really associated with managing our inventory and how we ran our plants as I said in our prepared comments. And then -- I think that covers it.

So, that was the -- that was sort of the unabsorbed overhead with the other half of that?

Yes, and some other one-time items that just come and go that we usually don't call out, but yes.

Okay. So, the unabsorbed overhead is in the $8 million to $10 million.

Correct, that's correct.

Okay. And then you mentioned a couple million dollars in the corporate S&A, was that on top of the $8 million to $10 million that you --?

Yes. It was on top of the $8 million to $10 million. The $8 million to $10 million was directed at the Petroleum Additives segment discussion, yes.

Got it. Got it. And then, sort of looking forward, I mean appreciate the comments on the -- on your outlook on the sustainability of the margin. I'm sure you [should have taken] a lot of questions with that, so thanks for that. Looking at the first quarter, my recollection is we've got a tough comp coming up. I mean, do you guys -- do you have a feel for how we ought to think about the first quarter relative to last year and how the year maybe plays out in terms of that growth rate that you said you expect?

Yes. I mean, that's a good question, Todd. We obviously know how January turned out and we just told you we anticipate to continue 2% growth in the industry and we're going to beat that. Our plans to beat that in January is consistent with that. I got to be honest with you as far as the comp on 1Q to 1Q. I haven't looked at that because we look at it more on a long-term basis than we do on a 1Q to 1Q kind of basis, but first quarter is developing as we expected.

Okay. So -- and as you -- so fair to say then based on what you just said that -- well, I guess you could say that it was sort of consistent with your growth expectations, so I assume that would mean that if you like the destocking, it's sort to run [course to] your customers or [whoever] -- whatever is depressing your customer demand?

Yes, that's correct. And as you know, because you followed us for a while, those destocking events can only last for some period of time, so that's what we believe, yes.

Okay. Thanks a lot.

You're welcome.

Ivan Marcuse, KeyBanc Capital Markets.

Hey, thanks for taking my question. A real quick on SG&A. So, with the $2 million gone, do you expect that run rate to go back to sort of -- I guess you're tracking in the $37 million to $38 million per quarter rate or would you expect it to be higher with the growth of next year?

Well, you know, Ivan, the estimate always kind of goes up with inflation, it goes with salaries and so forth, and then it typically goes up a little bit more because of increased efforts and you know that run rate if you take out the $2 million and compare it to the previous year, that's probably a good gauge.

I got you. And then, same sort of question for R&D. I mean you're continuing to increase spending there, so what kind of -- do you expect to spend (multiple speakers)?

Yes. Inflation plus some couple percentage points, pick the number, but R&D is never going backward.

Okay, so 5% to 7% or whatever [around that] sounds about right?

Yes.

Got you. And then on the next -- another question for raw materials. So, have you seen now our material costs as they leveled out for you and you'd expect that to sort of be lower on a sequential basis next and you know the following quarters or is it continue -- or is there some material costs that will continue to rise for you?

You know, I talked to our purchasing team before this call and they still see tightness in our key materials, and I guess yesterday I looked and oil was in the $100 barrel mark and that's kind of what their view is for the year. So, I guess the leveling-off would be an accurate description that you use.

Got you. And then -- sort of the growth strategy in 2012, are you looking to -- I mean is there any opportunity to acquire some assets out there or is most of your strategy that's going to be focused on growing in some under-penetrated markets such as diesel or whatever the various sub sectors are? How do you look at 2012? Where do you think most of the growth is going to come from?

It's mostly the latter. We see 2012, our approach to 2012 is very similar to the approach that has allowed us to see the success over the last five years. It's continued geographic expansion and continued product line expansion. Currently, we put a lot of investments into the Asia-Pacific region and we're looking for growth in that region, in particular in 2012. But our plans don't call for growth just in one region where we're looking for growth really around the world. The only area that -- that we call it out for concerns is really Western Europe with the issues there. But, in general, our industry and our -- and what we see, we're not that dependent on the economy. These are essential products. When an economy weakens, we do see some reduction in miles driven, particularly in the heavy duty segment, the trucking business, and that impacts demand but only somewhat. So, all in all, we're looking to grow volumes in most regions around the world.

Got you. And then real quick, David. Could you break -- give me the -- you may have and I might have missed, but could you give me the revenue bridge for petroleum adds? I know shipments were down 2%, what was the break out for price and currency?

For the quarter?

Yes.

Yes.

4Q to 4Q?

Yes. Yes, of that shipment $8 million negative, price $49 million positive, and currency $4 million positive. And if those don't add up, just nip one number off somewhere.

Got you. And then CapEx next year.

$60 million to $70 million.

Got you. Thank you very much.

You're welcome.

(Operator Instructions) Dmitry Silversteyn, Longbow Research.

Good morning. [Couple of questions]. If you look at this $8 million to $10 million one-time impact or unusual items impact that you talked about, the four items that impacted the quarter, plus the $2 million in corporate overhead, you're still kind of flattish year-over-year or would have been flattish year-over-over in terms of performance on the operating profit line.

Given that your revenue -- that your pricing was up very strong, and revenues overall despite the 2% decline in volumes were certainly decent, what's accounting for the perceived at least margin weaknesses? Is it that the timing of our base oil and other raw material costs versus your own price increases, or was it a mix issue? I mean, can you talk a little bit about the just the overall pattern of margins, if you -- even if you normalize the fourth quarter margin over the course of 2011? And I guess, I'm trying to tie this into your comment about margin stability for 2012 and trying to gain some confidence in that statement.

I'll comment on that and then ask David to add his thoughts. I don't see the story in the fourth quarter being costs or pricing or related to a spread between the two. It was really a volume story when you take the one-times out. Our -- we didn't -- we don't adjust spending in a quarter when we see volumes going down. We're spending for the future and many of our R&D programs take a long time. We're not going to disrupt them in the short-term for a quarter. And so I think that the spending probably play it into that, but mostly we see it as just the real weakness on the volume in the quarter that we don't believe is indicative of the year to come. David, any --

No, I don't have anything to add, I mean, Dmitry, as you know, we -- couple of variables are always going on when we -- when you drive it all the way down to margins. It's the margin at the gross level, which has impacted big time by volume (inaudible) plant. And then as Teddy said, we continued to spend at our planned rate on GS&A and R&D, which exacerbates that margin costs. So I really don't have anything other than that to add.

I guess, if I can follow-up on that, if you forget about the R&D and the SG&A costs, which as you know -- as you said, whatever the volumes do, you plan to continue to [spend the] longer-term programs, if I understand that. But even in the gross margin line, I mean, you're down at the levels we haven't seen since 2008 and down over a point sequentially. And then if I look at your inventory, it's only down $5 million, $6 million or $7 million sequentially. So it sounds like you ran your plants a lot lighter than would be suggested by the inventory going down.

We did because what -- unfortunately you see as the endpoint and we see all along the way, so we did run it a lot lighter towards the end of the year to get that number that you posed -- you talked about. When I look at gross margins, I may not see the same thing you see, if I had $10 million of profit back into the gross profit, we posted $125 million gross profit as the Company, change that to $135 million divided by revenue, I don't see the biggest drop that you're talking about.

Right, right. But I mean --

But once again, quarters give you [screwballing] arithmetics and we run this business on an annual basis.

I understand that, and I appreciate that, and I certainly look at the Company even I would say on a multi-year basis rather than a year basis. But when there's such a big discrepancy between expectations and results, it just [feels] like I have to dig into it.

Okay, moving on, if you look at the raw material story, you talked about kind of flattening out in terms of pressures on costs, we did see declines in base oil pricing. Group one has been out there for quarter-over-quarter. Is it starting to impact your P&L in the first quarter or are customers using the declines in base oil to pressure you for some price release as well?

We did not see any change in raw materials in the fourth quarter.

Right.

We might have stated that already. There were, as you know, some base oil changes. Those were small. They will flow through in the first and second quarter. I think the bigger item from our view is that our purchasing team expects that that was temporary in nature and that raw materials are going to start to climb back again some time in February.

Okay, okay. So you're kind of in the [bolt] and there seems to be some arguments about that, that the price declines we've seen across the petrochemical space, including base oil was more seasonal in the fourth quarter than cyclical.

Yes, yes, more seasonal.

Fair enough. And then just a couple of bookkeeping questions. What's your tax rate or what should my tax rate assumptions be for your Company in 2012?

32%.

Okay. And the 2% growth that you talked about the industry, the 1% to 2% growth, that includes pricing or are they just volume shift?

Volume.

Volume? Okay.

Volume only.

Thank you very much.

You're welcome.

Thank you. Saul Ludwig, Northcoast Research.

Good morning. Teddy, last year, your volume was up 6%. That probably was better than the industry. It was a great, great performance. Let's say very erratically with 17% growth in the first quarter then 11% and 0% then minus 2%, so there was really no consistency in the rate of volume change. And in thinking that the industry is going to be up 1% or 2% and you might be up 3% or 4%, but do you think there will be an erratic performance because the cost that you have to compare with are very distorted as you go through the year?

Yes. So, we've -- I think we've stated over the last year or so, maybe a bit of frustration on our parts are, it is getting harder to predict demand on a quarterly basis in this business, and we used to say second quarter, second and third quarters are the strongest with first and fourth, maybe 5% to 10% weaker. We just -- we don't hold to that anymore other than generally that fourth quarter is weak. But it's just gotten a lot harder to predict. So, yes, I think we will continue to see some difficult quarter-to-quarter comparisons on the volume.

Do you think the first two quarters of the year you might actually have down volume and then in the back end of the year you have much easier comps, you'll have up volume and you'd come in with this, rather the two, three quarter, whatever it is. But do you think that's the way we should sort of look at it from a sequential pattern?

Well, we're just looking at the year, but currently the way the math works on 2011, the first half was really strong and the second half was weaker, yes.

Okay. Are you seeing any pressure to give back a little on price as the raws have come down?

Yes, we're in kind of a wait-and-see mode on what raw materials are doing in the business. As David mentioned, the oil is back around $100 a barrel and eventually that impacts our broad basket of purchasing. And we'll just have to see how things pan out longer than just over a month or two.

So, so far, you're able to hold your prices, although it sounds like maybe some of your customers are starting to at least broach that topic?

Saul, I just want to look at it in a broader sense. We don't see this industry fundamentals to change any as it relates to demand and if it relates to supply and demand. You know how it works. When costs go up, we adjust; when cost comes down, we adjust and where we are at a given point in time, it's just difficult to say.

Got you. Are there any new facts that come into play in 2012 that could influence the competitive dynamics or the product mix influence or is 2012 [specs] kind of the same as 2011?

In a very broad sense, we don't see any major spec changes in 2012. There's some point of horizon, there's always some on the horizon and our spending reflects that in preparation for the future. Our products change in years when they're not spec changes as well. When we get breakthroughs in particular areas, we don't wait for spec changes to adjust in the market and sometimes, we see the benefits of that. Hopefully, 2012 will be no exception where we'll see the results of the investments we've been making that will hopefully drive our profits higher than those volumes that we are talking about.

David, you mentioned there was no share buybacks in the fourth quarter. In the nine months Q, you said you've spent $85 million for share buyback and in the 12 months report you said, you've spent $98 million for share buybacks, so that implies there was another $13 million spent in the fourth quarter, is there something I'm missing?

No, it's not, and you get [surprised]. What that was, Saul, is cash flow is on a cash flow basis. Obviously, those shares were purchased in the last two days of the third quarter, they settled in the fourth quarter, but from an accrual basis they happened in the third quarter. That makes sense?

(inaudible).

You got it.

In a broader sense, if you look at your revenues and how do they split between, let's say, US, Europe, Asia, Latin America, what's sort of the geographic breakdown?

We only publish out the US, which is what 36%, 37%, and the rest of the world. But Asia, I mean, the Western Europe, from a market standpoint, about 15% of the market and our numbers wouldn't be radically different than that. And then, we'd like to tell you, we're growing all the other ones [that we can].

You are not [digging] South America, are you?

We have a good presence in South America. I mean, I'm sure we'd like to expand it, but we have a very good presence in South America.

I'm looking at US is 37% and Europe is 15%, we are up to 52%, we've got another 48% left. Talk about -- or how would that in rough terms be split?

Canada is in there, Asia is in there, I said Western Europe, so you got Russia, [even] India and all that. So, we really don't delve it out -- dig it out.

Got you. And then the final question I have the share buyback spec -- the volume decline 2%, was that equally split between that lube and fuel?

No, it was not. And I neglected to emphasize that in my comment. Like '08, fuel has actually held up fine. I don't have the number in front of me, but it went up a couple percentage points and the drop was in the lubricant side, and that gives us a little confidence that some of this was in the inventory side.

Got you. Thank you very much, David and Teddy. Thank you. Bye-bye.

You're welcome.

Thank you, Saul.

Thank you. (Operator Instructions) [Jim Leonard, Private Investor]

Hey, Teddy. Hey, David.

Hey.

[Thank you] for a great year from -- as an investor, and your team did a great job.

Thank you very much. We appreciate that.

All right. Just wanted to give you a quick question about plant utilization and efficiencies, how are those running?

Our plant, they're running well. We're pleased with the progress that we're making. We ran them lighter in the fourth quarter as we mentioned. But all in all, we're pleased with how they're running. We've expanded on some, namely through bottlenecking and gotten a little more breathing room there. They're running hard in general on a yearly basis and we're pleased with them.

How is the storage capacity looking? Do you have the capability, when you have that big set of seasonal orders or maybe the market changes a little bit and you have a pretty good opportunity on sales?

That depends entirely on how big that surge is. It does concern us. We'd much rather see a smoother flow and a more predictable flow.

[Well, do we all].

Yes, but that's part of the reason why our inventories are where they are. It's to help us manage through those surges.

Well, that's good news. All right. Well, again, thank you for another great year, and take care, and maybe we'll get to see on the golf course sometime.

Thank you.

Ivan Marcuse, KeyBanc Capital Markets.

A real quick question, do you -- what's the revenue breakout, petroleum additives for fuel and lube additives, is it 80%-20%?

The market is about 80%-20%. Our revenue wouldn't be much different than that.

Great. Thank you.

You're welcome.

Thank you. (Operator Instructions) Robert Barringer, FBR.

Hi. Thanks for taking my question. There's just been a lot of play in the media lately about switching to natural gas, retrofitting trucks, et cetera. Just kind of curious, how that would impact you or how you're thinking about that?

That's one of many potential technologies that play into the future car and truck fleet. Natural gas engines will certainly have some applications, particularly in trucks and buses. I don't see that having a significant impact on our business in [in transit].

Is there a place for you in that area of natural gas? There is something you can do there as a business.

I'm not sure I understand your question. Our additive business will continue to produce additives that go into those applications.

Okay. Great. Thank you.

Sure.

Thank you. It appears there are no further questions. I'd like to turn the floor back over to management for any further or closing comments.

Well, thanks to everyone for joining and we look forward to our next meeting. Have a good week.

Thanks, everyone. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.