NewMarket Corp (NEU) 2012 Q2 法說會逐字稿

Greetings, and welcome to the NewMarket Corporation's second quarter 2012 financial results conference call. At this time, all participate 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's now my pleasure to introduce your host, David Fiorenza. Thank you, Mr. Fiorenza, you may now begin.

Thanks, Kevin, and thanks to everyone for joining us to discuss our second quarter performance at a little bit unusual time for us. With me is today is Teddy Gottwald, and I have our planned comments. Then, we will 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 2011 10-K. We filed our 10-Q this morning. It contains more details on the operations of our Company. Please take time to review it.

Net income for the second quarter improved to $55 million, or $4.12 a share, an increase of 6% over net income for the second quarter of the last year. For the first half of this year, net income increased to $122 million, or $9.09 a share, an improvement of 20% compared to the net income in the first half of last year. Earnings per share for the second quarter and the first half increased 9% and 24%, respectively. Earnings for both quarters of this year include a charge for an interest rate swap and for the early extinguishment of debt. Excluding these items from all comparable periods, earnings for the second quarter of 2012 improved to $63 million, or $4.69 a share, an increase of 15% over earnings for the second quarter of last year. The details of this information is highlighted in yesterday's earnings release.

Sales of petroleum additives for the second quarter were $584 million which is 2% higher than last year's second quarter. Shipments for the second quarter were about 7% lower than last year's second quarter and about 5% higher than the first quarter of this year. I would like to point out that the second quarter of 2011's shipments were the highest quarter in the petroleum additives' recent history while this year's second quarter is the second highest. When looking at the second quarter to second quarter comparison of revenue, revenue increased $43 million due to price and mix, decreased $21 million due to volume, and decreased $11 million due to foreign exchange impacts.

Petroleum additives segment operating profit for the second quarter of this year increased to $96.9 million, a 13% improvement over the second quarter of last year. For the second quarter, our operating profit margin was 16.6%. For the [four] quarters that ended in June, our operating margin was 15.8%. Both of these numbers, the 16.6% and the 15.8% are within our expectations of the performance of this business.

We did not repurchase any stock in the second quarter and currently have 13.4 million shares outstanding. In the July Board meeting, the Board authorized a total of $250 million for stock repurchases. This authorization is good until the end of 2014. This authorization, which is good for 2.5 years, is consistent with previous authorization levels which have averaged about $100 million per year. The previous authorization, which had $60 million unused, was canceled.

As you may recall, we entered into a new $650 million, five-year unsecured revolving credit facility which provides us with significantly lower costs to borrowing and increased operating flexibility to execute our plans. Since we established that new facility, we have funded the early redemption of all of the bonds we had outstanding at the end of the year. Those bonds had a principal amount of $150 million and a coupon rate of 7.125% and were due in December of 2016. Those bonds were redeemed on April 16. Additionally, we paid off the $63 million mortgage loan secured by the Foundry Park office building. While we have incurred one-time costs to put this facility in place, you can see the benefit of it in the interest expense section of the P&L with the second quarter to second quarter comparison showing over a $2 million benefit.

We had good cash flow generation in the quarter with $94 million of EBITDA. As detailed in the press release financials, there were quite a few items in the quarter associated with closing out the old loans and establishing the new ones. Working capital for the year has used about $50 million of cash, and we have spent $17 million on capital expenditures. We have reduced our debt by $54 million since the end of last year. We expect capital expenditures to be in the $45 million range for the year. We continue to operate with very low debt leverage. Our debt-to-EBITDA at the end of the quarter was well below one times ratio.

We recently announced the planned construction of a new additive manufacturing facility on Jurong Island in Singapore. The multi-year investment will be fully owned and operated by Afton. This investment emphasizes our continuing commitment to the expanding Asia-Pacific market. This addition will provide us with an excellent combination of research and development, sales and marketing support, and manufacturing all in the region. This facility will also improve the security of supply and reduce lead times of delivery of our products to the customers in that region. We anticipate an initial investment in excess of $100 million with significant spending beginning in the second half of 2013. We plan to start up the plant in mid-2015. At the same time, we also announced Dr. Warren Wong's intention to retire on April first of 2013, and the appointment of Rob Shama to replace him as President of Afton Chemical on January first of 2013.

We have begun 2012 with very good results. We believe the fundamentals of how we run our business, a long-term view, safety-first culture, customer-focused solutions, technology-driven product offerings, world-class supply chain capability, and a regional organization to better understand our customers' needs continues to pay dividends for all of our stakeholders. We expect 2012 to be more profitable than 2011. Our business is executing well, and there has been no significant change in the fundamentals of the petroleum additives business. We expect the long-term industry demand to continue to grow at a rate of 1% to 2% volume improvement per year.

While we plan to exceed that rate in the long run by focusing on areas of the world where we are underrepresented and delivering products that specifically meet the needs of those areas, we are not certain that this year's overall market growth rate will be that high. We have seen some softness in demand recently that we believe is associated with the global economic slowdown and uncertainty around the world. We currently expect that our demand in the second half of 2012 will be slightly lower than the first half by a few percentage points. As a reference, in 2011, the second half had volumes over 10% lower than the first half of 2011.

I would like to emphasize the fact that the near-term demand has become more difficult to predict in our business. Given this view of the second half, the year-on-year comparison of volumes would have 2012 roughly flat with 2011. Those are all the comments I have. And, Kevin, I would like to open the lines for any questions.

We will now be conducting a question-and-answer session.

(Operator Instructions)

Our first question is coming from Ivan Marcuse from KeyBanc Capital Markets. Please proceed with your questions.

Hi, thanks for taking my questions. In your -- for the volumes for the second half, just to be clear. So, even though they are going to be down sequentially, you still expect them to be up on a year-over-year basis?

Yes, that's correct.

And then, would material costs -- is that going to flow about the same? Would you expect it to be down in the second half versus the first half? And by about what degree would you gauge it at right now?

No, Ivan, that's always a little bit difficult one. Our outlook is that in the second half, we'll be roughly the same as the second quarter. So, we don't see any big movements in either way. We all know base oil has trended down, but all the materials haven't done that. Our planning base is they will be about like they were in the second quarter.

Got you. And then, moving over to the new plant that you announced, how big is this going to be? Meaning, how much capacity is this going to add to your global footprint? And does it start up in 2015, and it's full-go? Or do you expect to ramp-up over a multi-year period? And how should I think about that looking out?

Ivan, this is Teddy. You should look at this plant as being incremental to what we have. And when we start it up in 2015 -- mid-year 2015 -- we'll essentially be starting up a detergent plant first, and adding on to it over a period of years. We're not prepared to say what else we're adding initially because a lot of those decisions are still being worked through.

It's not huge capacity initially relative to what we have in place and relative to the market, but it is a significant step for us. This plant, coupled with the dispersing capacity we already have in place in Singapore with our toll manufacturer and blending capacity there, gives us a much better footprint to serve our customers in that region with shorter lead times. It gives us some breathing room in existing plants, and it positions us -- particularly as we add to it in the several years beyond 2015 -- it positions us well to have the capacity to meet our growth ambitions.

Great. Thanks for all that detail. One last question, if -- I see you've been into buying back stock. You have been paying down debt. When you look at either paying down debt, because you are barely any leverage at all, and I don't think the debt is -- it might be 1.5%, 2% right now. Why buy back debt versus buying back stock or even increasing the dividend? How do you and the Board look at that? And how are you looking at it going forward?

Our views on those issues haven't changed. We still look at the relative price of the stock, the potential for acquisitions in the near-term, and general overall uses of cash, including stepped-up capital spending. It all fits together, and our views really haven't changed on how we approach that.

Great. Thank you for taking my questions.

Sure.

Thank you. Our next question is coming from Todd Vencil from Sterne, Agee. Please proceed with your questions.

Hi, good afternoon.

Hi, Todd.

David, I think I might have missed it or half-heard it. Did you weigh in on the top line, the revenue in the back half of the year given that you've had some price increases, but that volumes are going to be down a little versus the first half?

No, we didn't, Todd. We didn't comment on that. Our comment was really on the shipment side.

Okay. So, then I will ask it in the form of a question. Given that you have had some price increases, is it reasonable to think that that might offset or more than offset whatever level of decline in volumes you are thinking about?

Yes, I haven't actually thought about that, but that's not an unreasonable assumption.

Okay. Should we be thinking about any sort of margin impact from the lower shipments?

We said 2 percentage points. There might be some, but it would be a small, as opposed to some big number that I would have to call out.

Okay. So, maybe in the range of the error band that you have got around your general guidance? Or a bit below that?

I don't know what that general guidance means, but I won't be telling you it's $10 million, is what I'm telling you, in subsequent quarters.

Got it. Switching to the swap costs, are we done with that now? Or are we still going to see some impact from that?

No, that particular swap was actually not affected by us taking out the Foundry Park loan. So, we will still see that in subsequent periods.

Okay. And then, the other thing is, tetraethyl lead, something special going on -- or tetraethyl lead and other, I guess I should say, something special going on this quarter?

Yes, there were a couple of one-time favorables. Last year's performance is a better guide of what that is going to be going forward than looking at the second quarter and thinking something is going on there.

Anything in particular in terms of one-time favorables we ought to think about? Or just noise?

No, it was just -- we always look at future costs and mark them to current expectations. Nothing that is of any interest in anything.

All right. Thank you very much, then.

You're welcome, Todd.

Thank you.

(Operator Instructions)

The next question is coming from Dmitry Silversteyn from Longbow Research. Please proceed with your question.

Yes, hi. I just wanted to understand a little bit better the quarter-to-quarter volatility in margins we saw between the first and the second quarter in the additives business. If you just look at the sequential margin move, how much of that was lower production volumes versus a raw material run-up sequentially? And was there a big mix component to that? I'm just trying to get my hands around the 2.5, 3 point sequential move in margins.

Yes, Dmitry, that's an excellent question. We've got to go back to the first quarter to answer that. So, when we posted that 19.2%, I think it was in the first quarter, we talked about that really was a perfect storm in a good sense. Raw materials dropped through the P&L -- happened quickly. Margins expanded, and now this quarter we are posting, what, 16.4% or so, 16.6%. I would say the 16.6% is more in the band of what we expected than the first quarter. So, there's really not much to point to. It was just a good set of circumstances in the first quarter.

Okay. But by that token, was the declining base oil pricing that we are going to see in the second half of the year, why aren't you more confident about your margins in the second half of the year, assuming that you can hang on to pricing through this decline in base oil costs?

Well, I would just like to focus on the fact that when there's sustained movements, we do deal with that with our customers. And 15%, 16%, 17% is what we think this business can make on an annual basis.

Okay. Fair enough. If you look at the year-over-year results now in the petroleum additive segment, your revenues were up, roughly speaking, about $10 million, and that was actually what your operating profit was up. So, your incremental margin by that calculation was pretty close to 100%, which obviously isn't the case. On a year-over-year basis, was it more of a mix? Or a price realization? What drove the high conversion of top line to profit dollars?

Yes. Again, it's a good question, and it just has to do with where your start point is. We are always catching up, or we are always lagging. I don't have a real scientific answer for you on that question.

Okay. Then, I can just follow up with one more. We know the base oil situation, it's pretty public. But can you give us an idea of what's going on with your other raw materials? The additives that you buy from third parties to blend with your own, packaging, deliverable costs? How should we think about the broader raw material basket?

I think the way you should look at it is a comment we made just a little while ago that we look at that overall outlook for raw materials to be flat with the second-quarter performance. Yes, we all know base oil has gone down, but remember, base oil is 20% of our purchases. And that other basket isn't following that right now.

Okay. So, you are still seeing price pressures on the --?

No, we're not seeing all the drops. So, when we look out, we see a flattish raw material picture.

Okay. Got it. All right, and then just the $5.5 million corporate and other run rate that you had in the last couple of quarters, that's a good rate to use for the balance of the year?

Yes it is.

Okay, that's all I had. Thank you.

You're welcome.

(Operator Instructions)

The next question is coming from Saul Ludwig from Northcoast Research. Please proceed with your question.

Good afternoon, everybody. I wonder if you could give us some granularity on the 7% volume decline? Did that differ much by Asia, Europe, and North America?

Saul, when we look at the volume decline, we see more a difference in Europe when we look at our numbers. I almost hesitate to say that, because coming off of a record quarter, to a second record quarter, it is the arithmetic. But it's hard to say it was bad. So, Asia, yes -- I mean, Europe, yes. I'm sorry, I misspoke.

And how about Asia? Were they up, or down, or flat, or --?

Asia was up. Latin America was up. Predominantly, Europe and then some North America.

Okay. And in terms of pricing, you talked about raw materials being flattish going forward. It's a little surprising, actually, when you think of ethylene is down and propylene is down. And oil is down, and anything to do with petrochemicals seems to be down. I'm surprised that your other basket of raw materials isn't directionally moving lower. Am I missing the boat someplace? Or should they be trending lower because all of these peripheral products that would go into those other materials -- butadiene -- everything is sort of heading south pretty sharply.

Well, when the day is done, you may be right. But when it's also a fact that if that happens, we will be having to deal with that on the revenue line. That's why I'd like to focus you on the longer-term margin of this business, and so we don't get all caught up in that. I'm just saying right now we are not seeing that.

Okay. And are you assuming -- let's go back to the flat raw materials sequentially. Would you assume pricing then would be fairly flat -- your unit price be fairly flat in your back-end of the --?

I think that's a fair assumption, yes.

And then, another question, David. With the volume being down, are you running your plants a little less full than you did previously? And has there been any impact from the fixed cost absorption in the second quarter? Or might there be any fixed cost absorption issues and expenses in the back-end of the year?

I think the second quarter run rate and the third quarter run rates will be close to each other. Some number one, two, three, pick a number, one million -- that was kind of Todd's question a little bit earlier. But you know what, that gets lost in all of the other moving variables that we have.

Yes. And then, Teddy, you have been talking about acquisition searches for as long as we have been on these calls. What do you think the opportunities are that are out there? Or are we at the point to say, it's just unlikely that there will be anything in the acquisitions?

Saul, we have been stressing patience ever since we really started talking about it, and that's still a key word here. There are not that many opportunities in our field, and we're not spending a whole lot of energy looking beyond petroleum additives. We are looking a little bit outside, but most of our focus is on acquisitions in our field, and there are just not many of them. So, yes, you shouldn't expect a whole lot of activity there.

Okay. Very good. Thank you very much for good answers.

Thank you.

Thank you.

(Operator Instructions)

It appears there are no further questions. I will turn the floor back over to management for closing comments.

Well, thanks, everyone, for joining us, and we'll talk to you on the next call. Have a good afternoon.

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