NewMarket Corp (NEU) 2012 Q3 法說會逐字稿

Greetings, and welcome to the NewMarket Corporation third-quarter 2012 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, Dave Fiorenza. Thank you, sir, you may begin.

Good morning, thank you. Thanks for joining us to discuss our third-quarter performance. With me today is Teddy Gottwald. I have a few planned comments, after which Teddy has a few about the special dividend, and then after that we will be happy to 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 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 plan to file our 10-Q today. It will contain more details on the operations of our Company. Please take the time to review it. Last night we posted three releases, the earnings report and two on dividend action. I hope you have had a chance to review them.

Net income for the third quarter was $64.7 million or $4.83 a share, compared to $71.4 million or $5.22 a share last year. Year-to-date net income was $186 million or $13.91 a share compared to $173 million or $12.54 a share for last year. You may recall that last year we had the benefit of a legal settlement that was recorded in the third quarter. Additionally, we had various other items that are all detailed on the front page of last night's earnings release. Excluding these special items from all periods, earnings for the third quarter were $65.8 million or $4.91 a share, which is a 19% increase over earnings for the third quarter of last year. Likewise, year to date for 2012, earnings were $196 million or $14.62 a share, an improvement of 23% compared to last year's result of $159 million of $11.52 per share. Earnings per share for the third quarter and first nine months of this year on this basis increased 21% and 27%, respectively.

Petroleum additives net sales for the third quarter were $548 million, which is a decrease of $4 million or about 1% from last year. The decrease in sales was primarily due to an unfavorable foreign exchange impact, partially offset by higher selling prices and mix. Total tonnage were substantially unchanged in this comparison. The approximate components of the change of revenue were $16 million unfavorable due to foreign exchange, $10 million favorable price and mix, and $2 million favorable shipment mix. Petroleum additive net sales for nine months were $1.7 billion, which were approximately 3.8% higher than last year's nine months. The increase between the two nine-month periods reflects higher selling prices, partially offset by unfavorable foreign currency, as well as a 3% decrease in product shipments. Petroleum additives segment operating profit for the third quarter of this year was $96 million, a 15% improvement over the third quarter of last year when the legal settlement is excluded.

For the four quarters that ended in September, our operating profit margin excluding the legal gain was 16.4%, which is well within our expectations of the performance of this business. We did not repurchase any stock in the third quarter, and currently have approximately 13.4 million shares outstanding. We have a current authorization of $250 million for stock repurchases. This authorization expires at the end of 2014. The favorable quarterly comparisons on interest expense reflect the new debt structure that was in place for the entire quarter, as well as lower debt outstanding.

We had very good cash flow generation in the quarter, with $105 million of EBITDA. The summary of our cash flows are also contained in the press release financial information. Working capital for the year has used about $41 million of cash, we spent $25 million on capital expenditures, we have reduced our debt by $99 million since the end of last year, and have $29 million more cash on hand. During the quarter, we had an expected favorable $11 million inflow associated with previous legal settlements. We expect capital expenditures for the year to be in the $35 million range. We continue to operate with very low debt leverage. Our debt-to-four-quarters EBITDA at the end of September was well below 1 times.

We have had excellent results this year. 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, and a regional organizational structure to better understand our customers' needs, continues to pay dividends to all of our stakeholders. Our business is executing and performing well, and there have 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 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 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 also believe that this has resulted in a small contraction in the finished lubricant market this year. As we have discussed previously, near-term demand has become more difficult to predict in our business. Given our view of the market, the year-on-year comparisons of volume would have 2012 roughly flat with 2011 on the shipment line. This is no change from our previous outlook. That concludes my comments.

Teddy, would you like to make a comment?

Sure, thank you. Good morning. As you know, the NewMarket Board yesterday approved a special dividend of $25 a share payable to shareholders on November 27. We will use excess cash and our bank revolver to fund the $335 million special dividend. This will raise our debt-to-EBITDA ratio by a modest amount.

Over the past five years, we have discussed with you our strategy to grow our petroleum additives business, to look for acquisitions in the petroleum additives market, and then use share repurchases and dividends to improve shareholder value. Over this past five-year period, we have made two successful but small petroleum additives acquisitions. We have spent over $330 million to buy back about 4 million of our shares, or about 23% of the shares we had outstanding in 2006. And we have raised our dividend six-fold to its current level of $0.75 per quarter. Also during this period, we have reinvested nearly $500 million in our businesses to support our customers and grow our business. We have maintained a healthy and conservative balance sheet throughout this period.

Today, we still see plenty of room to grow in our core petroleum additives business. We expect our future volumes to grow somewhat faster than the industry rate of 1% to 2% per year. And our plans call for increased investment in the business to support our customers worldwide and to capture growth. We are generating a significant amount of cash in excess of our internal growth needs, even with stepped-up capital spending over the next several years. We continue to focus our acquisition strategy on the petroleum additives market. And since there are limited opportunities here, we told you we are going to be patient, find the right acquisitions, and not buy a business we know nothing about.

Maintaining a modest amount of leverage is an important way for us to maximize shareholder value. This special dividend provides an immediate return for shareholders in a low tax rate, efficient environment. After this dividend is paid, we will still have a conservative balance sheet with plenty of capacity to continue to pursue acquisitions, use some or all of the $250 million authorized by the Board for share repurchases, and provide a healthy regular dividend. We are optimistic about our future, and we will continue to use all means at our disposal to increase shareholder value.

David?

Thank you, Teddy. Christine, we would like to go ahead and open the line for any questions.

Thank you.

(Operator Instructions)

Ivan Marcuse, KeyBanc Capital Markets

Hello guys, great quarter. Quick question. You said that you expect volumes for your business or at least on a shipment level to be flat for the year. But in the first quarter, I think shipments were down one, second quarter, down about seven or eight and flat this quarter. So that implies that volume should be up in the third quarter even though the market is contracting? Is that how to think about it?

Ivan, this is David. Yes. You said third, but fourth, and we expect that it will be better than last year's fourth quarter. And that will net out to a flattish year, yes.

Got you. And then, with the leverage you bring on the balance sheet, where do you expect interest expense for next year to go up to or at least on a quarterly basis?

Well, if you borrow the whole $335 million and we pay about 2% on the revolver, that would be the arithmetic.

Got you. And then with material costs looking at the third quarter, how down was the basket on a year-over-year basis?

On a year-over-year basis, it was down just a point or so. I would call it flattish given the mix and so forth. It was not either way much of anything. A small decline.

Got you. And then going forward with that, since it is going to be on your revolver, and I guess you could pay it down fast or as often as you want to do, is that the sort of acquisitions in investing in your business? Is that going to be a priority to pay down the debt going forward over the next year or two versus a share buyback or dividend? Or how would you weight that?

You know Ivan, as Teddy said in his comments, we are winding up after this is done, but still with very low leverage. So there's not any pressure on our net to take every dollar we earn and pay down the revolver. So we're going to look at all of those choices just like we always have and pick the one we think gives the best return to our shareholders.

Great. And then with your tax rate, with your business in China growing a little bit it looks like, would you expect your tax rate to sort of tick down over time due to sort of a mix being less US? Or how do look at that going forward?

I don't know what number you have right now. But if you think of 32% or 33% this year, over time we have some plans in place that would trail those down. So your observation is correct.

Got you. I'll jump back in queue.

Kevin Hocevar, Northcoast Research.

Good morning, guys. How would you say the volumes fared compared to the industry? A lot of what we're seeing is that volumes are down across a lot of the industries. So just wondering, if you think you outperformed the industry? Did you gain market share during the quarter? Just want to get your thoughts on that.

Kevin, looking at it over the course of this year, as opposed to the quarter, I would say that we think we are doing better than the market. Our view on the overall market this year is that it has contracted in the kind of mid-single digit percentage range. We don't feel that is sustainable. We think that it is a blip in the 1% to 2% growth pattern that we expect to continue to see over a longer period of time.

Okay. And in terms of the geographic breakout of the volumes, could you kind of give a sense for what performed well geographically and what under-performed?

I would characterize what we have seen as a widespread change. It is not any one region. I think certainly North America and parts of Europe have seen the decline. And we would characterize Asia as being disappointing and not seeing the growth that we had expected. Less growth in the region. So it is widespread.

Okay. And then finally, it looked like you got some more price in the quarter than raws may have been down a little bit, but the price was up? Do you think the timing of that, do you think you might have to give some price back in the fourth quarter? Or do you expect that to be fairly sticky?

That's a very good question. Our outlook for raw materials in the fourth quarter are flattish with the third quarter. So we will just have to take that as it comes with respect to that question.

Okay. Thank you very much guys.

You're welcome.

Eugene Fedotoff, Longbow Research.

Good morning, guys. Congratulations on a good quarter. Just a couple of follow-ups I guess. As far as [salt and stuff], you mentioned there, where do see that as far as geographies? Are you seeing the weakest demand in Asia or Europe or North America?

We have seen it widespread, and probably the easiest thing to see is industrial activity in the world, which is reported on all the time. And when that goes down, the need for lubricants and the need for additives for lubricants and that goes down also. But the slowdown really should be characterized as widespread as opposed to any one spot.

Okay. So the growth in volumes year-over-year for fourth quarter, do you still expect volumes to be sequentially flat or down, right?

That is correct.

Okay, and just a follow-up on the material costs, you also mentioned that you expect a flattish raw material environment in the fourth quarter compared to third quarter. What are your expectations year-over-year? It seems like raw material costs or at least base oil [costs] for one increased significantly towards the end of the year, last year or maybe earlier this year. So are you expecting those comps to get better on a year-over-year basis?

Are you asking about fourth quarter to fourth quarter?

Right.

I apologize, I don't know the answer to that. I tend to focus on third quarter to fourth quarter.

Got you. All right, thank you.

You're welcome.

(Operator Instructions)

Ivan Marcuse, KeyBanc Capital Markets

Thanks for taking my follow-up. A couple of quick questions. First, what was sort of the strategy behind doing the special dividend versus the buyback? How do you view that, and why that decision?

Ivan, as we mentioned, we constantly evaluate all methods or all uses of cash and leverage. And we certainly weigh them against each other and also look over a period of time. As we have said, we have $250 million authorization outstanding today, and it is my view that we will use that going forward. It's good through the end of 2014 as David mentioned. We will certainly look at using and doing some share buybacks as we go forward. The special dividend does not limit our ability to do buybacks. I may not be answering your question directly, but it is sort of all of the above as we look at it.

Got it. And then in the first quarter, you had the blockbuster quarter, and then you basically said -- don't take that quarter and multiply it by four. But essentially, it looks like so far, the first nine months were more or less on that track. And then with volumes being up in the fourth quarter, and pricing, and the price costs probably remain relatively stable. Why wouldn't you have another great quarter?

Back to your first question, when we said that in the first quarter, we really believed it, but as life turned out, we were happy we were wrong.

And we were wondering who was going to ask us that question. (laughter)

Yes other than the normal variation that the fourth quarter typically brings, the fundamentals of the business will continue to be good in the fourth quarter.

Right. So the only difference between fourth quarter, third quarter is just a little bit of a seasonal tick down.

That is an accurate statement.

And raw materials, you are looking for at a sequential basis, stay flat.

That is our planning base, yes.

Should there be any change in pricing? Is there a lag or anything else going through there?

I can't think of anything that would pop out on that question.

Great. And last question, a competitor of yours is sort of looking, I guess, to vertically integrate as an opportunity to grow in the business -- a competitor in your field, that is. Would that ever be an option for you, not necessarily what that competitor's doing, but I know you are already vertically integrated in some areas, but is that an opportunity for you on the acquisition front? Or are you going to stick pretty much to buying technologies even though they are sort of small and few and far between?

We will certainly consider any opportunity that makes sense for us. And that would include make versus buy decisions on a number of key raw materials. So yes, we would consider vertical integration. We are really focused on acquisitions that can help expand our technology, give us access to more markets and help us grow the business.

Right, the vertically integrating I'm thinking about it, is not outside your wheel house, it's something you know how to do and it would be something you would consider in the future if there was an opportunity?

Yes. That's correct. And like Teddy said, it really comes down to a make versus buying decision a lot of times.

Great. Well great quarter. Thanks again.

Thank you.

(Operator Instructions)

Tom Leritz, Kennedy Capital Management.

Just a question on the capital allocation. When I look at the business over the last several years, you guys have really done a good job of increasing returns to a higher plateau way above your cost of capital. Just wanted to think about that. You give that cash back to the shareholders, and we don't earn a good return on that. It would seem to me that you would have a lot more opportunity to grow the asset base either inorganically or organically. Could you just talk about that thought process? You've got these higher returns, why not make acquisitions more aggressively or try to grow the business more aggressively rather than give the cash back to us?

Sure. Happy to comment on that. First of all, as I mentioned, we do see it sort of as all of the above. We have talked with you previously about capacity expansion in Asia and Singapore in particular. We do have significant plans for more reinvestment in the business over the next five years as compared with the previous five years.

Our model of approaching the market is a customer intimacy model. It is a model of creating value for our customers working specifically with customers to provide markets or provide products for their markets that help them grow their business and lower their cost. We are not a company that takes a shotgun approach to growth. We take a measured approach to it. And we see a lot of opportunities in our marketplace. But we are taking a measured, systematic approach to achieving that growth.

Okay, thanks.

Mr. Fiorenza, we have no further questions at this time. I would now like to turn the floor back over to you.

Thanks to everyone for joining in, and we will talk to you at the end of the next quarter. Have a good day.

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