NewMarket Corp (NEU) 2012 Q4 法說會逐字稿

Greetings and welcome to the NewMarket Corporation fourth-quarter 2012 and year-end financial results.

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, Vice President, Treasurer, and Principal Financial Officer for NewMarket Corporation. Thank you, Mr. Fiorenza, you may begin.

Thank you, Brenda, and thanks to each of you for joining us to discuss our fourth-quarter and year-end performance. With me today is our CEO Teddy Gottwald. We each have a few planned comments and 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-K for this year in the second half of February. I will be referring to the numbers that were included in last night's release.

NewMarket's net income for 2012 increased to a record $239.6 million, or $17.85 a share, compared to net income of $206.9 million, or $15.09 a share, for the previous year. For the fourth quarter of this year net income was $53.1 million, or $3.94 a share, compared to net income of $33.7 million, or $2.51 per share, for the same period last year.

The earnings for 2012 and prior year periods include certain special items that are explained on the front page of the release. Excluding these special items from all periods, earnings for the year 2012 were a record $242.8 million, or $18.08 per share, an increase of 25% compared to last year's results of $193.7 million, or $14.13 per share.

On this same basis earnings for this year's fourth quarter were $46.7 million, or $3.47 a share, an improvement of 35% over last year's fourth-quarter results of $34.5 million, or $2.57 a share. Earnings per share for the year and fourth quarter of this year increased 28% and 35%, respectively.

As we had mentioned a number of times, near-term demand variation in our business have become harder to predict. Having said that the fourth quarter historically has been somewhat lighter quarter and this one is consistent with that pattern. Petroleum additives net sales for the fourth quarter were $511 million, which is an increase of $12 million or approximately 2.5% higher than last year.

The increase in sales was almost entirely due to increased volume partially offset by unfavorable currency impacts. Shipments were up about 4% in this quarterly comparison. Currency impacts for the quarter were in the $6 million adverse range.

Petroleum additives operating profit for the fourth quarter was $71.6 million, an improvement of 21% over the fourth-quarter operating profit last year of $59.3 million. The profit improvement between these two fourth-quarter periods was primarily driven by volume improvements and the absence of some one-time costs we discussed last year. And those were offset to some degree by planned spending in S&A and R&D.

We are very pleased with this quarter's results and the improvements over last year's fourth quarter.

Petroleum additives net sales for the year of $2.2 billion were approximately 3.5% higher than last year. The increase between these two years reflects higher selling prices offset partially by an unfavorable foreign exchange impact as well as a 1.5% decrease in shipments for the year. Petroleum additives operations had a record performance for the year in 2012 with operating profit of $372 million, an improvement of 20% over last year's operating profit of $309.6 million excluding last year's legal settlement gain.

We posted an operating margin of 16.9% in this segment for the year. This result is within our expectations of the performance of this business with the mix of business we sold last year. During the fourth quarter we posted a 14% operating margin, which is also within our expectations of the normal business variations in the lighter quarter.

Lower volumes do impact gross margins, and because we do not adjust GS&A spend based on the anticipated quarterly shipment, the volume impact is magnified in the operating margin. We are pleased with both the quarterly and full-year results for the petroleum additives business.

We did not repurchase any stock in the fourth quarter and had approximately 13.4 million shares outstanding at the end of 2012. We have a current authorization $150 million for stock repurchase. This authorization expires at the end of 2014.

As we announced during the quarter, we sold $350 million of 10-year bonds at a coupon of 4.1%. We were pleased to receive an investment grade rating from Moody's and Fitch, recognizing our strong financial position. While the bonds will result in a higher interest cost versus 2012, this provides us with significant long-term capital at very attractive fixed rates. We are confident this will help us to achieve our business plans in the years to come, giving us flexibility and security to create shareholder value.

We had good cash flow generation for the year with $393 million of EBITDA. The summary of our cash flows are also contained in the press release information.

Working capital for the year used about $14 million of cash and we have spent $39 million on capital expenditures. We paid $375 million of dividends this year, which includes the $25 per share special dividend in the fourth quarter, and we have $39 million more cash on our balance sheet than we did at the beginning of the year. We did all of these items by only increasing our debt $185 million for the year, ending with a debt of $429 million and $89 million of cash.

We expect capital expenditures to be higher in 2013 than we have had in the recent past and expect it to be in the $80 million to $100 million range. This increase supports our plans in Singapore as well as several improvements to our manufacturing infrastructure around the world and additional spending in support of R&D activities. We expect CapEx to stay in the $80 million to $100 million range over the next three to five years in support of our worldwide business.

We continue to operate with very low debt leverage. Our debt to EBITDA ratio at the end of the year was about 1.1.

I would like to turn it over to Teddy for a few comments that he would like to make.

Thank you, David. As we begin 2013 we are confident that our customer-focused approach to the market is the right path for us to continue down. We believe the fundamentals of how we run our business -- a safety-first culture, our customer-focused solutions, technology-driven product offerings, world-class supply chain capability, and a regional organization structure to better understand our customers' needs -- will continue to pay dividends to all of our stakeholders.

We have plans and expectations that our petroleum additives segment will deliver improved results in 2013 versus 2012 on top of having posted record profits for each of the last few years. While we have been told that many finished lubricant and gasoline marketers saw a decline in their 2012 shipments of 5% or more and we were adversely impacted by that market decline, we expect petroleum additives industry demand to resume its growth at an average yearly rate of 1% to 2% over this next five-year period as there has been no significant change in the positive fundamentals of this business.

Over the past several years we have made significant investments to expand our capabilities around the world. These investments have been in people, technology and technical centers, and production capacity. We intend to use these new capabilities to improve our ability to deliver the goods and services that our customers value and to expand our business and profit. And we have plans to continue to expand these capabilities to provide even better service, technology, and customer solutions.

Over the past five years our shipments have grown at a compounded annual rate of 2%, including this past year's downturn. As we look ahead at the next five years, we believe we are positioned to exceed the industry's 1% to 2% volume growth rate by a few percentage points.

As a reminder, we have a corporate goal of achieving at least a 10% annual return to our shareholders averaged over any five-year period. We expect to be able to achieve this goal over the next five years.

As a global company operating in many countries around the world we are not immune to world economic conditions. Western Europe and the euro are a significant factor in our business and financial results, as is the general economic activity around the globe. Our planning assumption for 2013 is that we will operate in an environment of modest economic recovery around the world.

Our business continues to generate significant amounts of cash beyond what is required for the expansion and growth of our current product line. We regularly review the many internal opportunities which we have to utilize this cash, both from a geographical and product line point of view.

We continue our efforts in investigating potential acquisitions as both a use for this cash and to generate shareholder value. Our primary focus in the acquisition area remains on 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, just as we have in the past, we want to stress that we are patient in this pursuit and intend to make the right acquisition when the opportunity arises. We will continue to evaluate all alternative uses of cash to enhance shareholder value, including stock repurchases and dividends.

David, turn it back to you.

Thank you, Teddy. Brenda, we would like to go ahead and open up the lines for questions.

(Operator Instructions) Ivan Marcuse, KeyBanc Capital.

Thanks for taking my questions. Real quick, what was the sales bridge for the fourth quarter? You said FX was down $6 million, so was price mix flat on a year-over-year basis?

Yes, yes. The two factors were volume as you -- and then FX, as you mentioned. The price mix [was flat].

Then on the raw material front, did you -- I know base oil has been sort of trending down, but all of your other products have seemingly been trending higher. So is the total basket on a sequential basis from third quarter to fourth quarter flat? And then what is your expectations moving into at least the first half of 2013 for your raw material basket?

Good question, Ivan. Yes, when we look at the fourth quarter compared to the third quarter we see a flat raw material basket. When we look out into next year we have seen some announced decreases in Group II and III type base stocks; hadn't seen that much change in Group I. We are seeing some increases in some of the other raw materials.

So flattish to slightly up is my answer to your question about what are we seeing in the first half of next year.

Great. Then do you use more -- I know that the industry trend, at least for additives, seems to be skewing more towards Group II and III. Are you using less and less of Group I or how do I think about that trend going forward?

Ivan, this is Teddy. We are following that same industry trend.

Great. And you have a lot of -- there is a lot of capacity in Group II and III coming online in the industry over the next year or two, couple of years. So does that impact you? How do you think that will impact you and the industry? And is that a positive or sort of a net neutral?

Well, I guess you could look at it anyway you want to. I tend to look at it as a slightly positive. As more and more of these base stocks become available our customers will look to us to formulate our products to let them take advantage of that which will give us an opportunity to show off our technology. So neutral to net positive is my answer to your question.

Got you. Then the last question is just for the full year what was your cash from operations, the total amount?

I want to say 270-something or another.

Great. All right, thank you.

Kevin Hocevar, Northcoast Research.

Good morning, guys. In terms of the margins that you guys got during the quarter, the gross margins seem to expand about 250 basis points on a year-over-year basis. I am just wondering if raws were pretty flat, price was pretty flat; I know you mentioned the pickup in volume improved utilization at the plant.

So is that the entire reason for the margin expansion? Is it the better utilization rates or were there any cost cutting efforts as well?

Remind me what period you are asking this question about?

For the fourth quarter.

Fourth quarter versus fourth quarter you are absolutely right; plus you may recall last year we called out that we had a $4.5 million one-time charge for a contract position we had taken. So if you take that out then it is exactly as you are looking at it.

Okay. And when we look at the shipments improved 4% in the fourth quarter is there anywhere -- is this a function of improving end market demand? Or was it simply just it was an easier comp and you are not really seeing pick up anywhere but it was an easier comp?

That is a really difficult question to answer with great certainty, but let me give it a shot. The fourth quarter is typically our lower quarter than the third quarter and the pattern that we saw in the fourth quarter didn't surprise us at all. On the other hand, last year's fourth quarter was a little bit lower than you might expect so easier comp is probably the answer to your question.

Okay. When we look into 2013 I know you mentioned the expectation at this time, obviously that could change, but is that raws might tick up a little bit. So as we look at the margins, you put up very impressive margins this year. I think you said 16.9% in petroleum additives.

Should we expect that -- is that maintainable or do you think that these will kind of go back to the 15%, 16% type margins, kind of the long-term expectations for the segment?

This is David. 15% to 17% for us is the kind of margins on a longer-term basis, meaning not any one quarter necessarily, that we believe this business can deliver. So if we ended next year in that range that would be within our expectations and I don't think we can cut it much closer than that.

Okay. And then final question. In terms of -- you have been growing R&D spending about 10%-plus the last couple years. Just wondering if you could elaborate on the successes of that, is that one of the big drivers that we have seen in the improving overall margin? I was just wondering if you could elaborate on how about has been going, the increased spending.

Kevin, I would say that, yes, the increased spending is what is driving our improvements. A lot of the increased spending has been focused on the international markets, the areas where we have traditionally had less presence and I think that is paying off. It is helping us in traditional markets as well as to broaden our product lines.

So we are pleased with the progress. The increased spending is necessary in this market because the demands being placed on our customers' products continue to increase. So we expect to see another increase this year in R&D in support of our customers and increase in R&D-related capital spending also to expand our testing capabilities.

Okay. Thank you guys very much.

Todd Vencil, Sterne, Agee.

Good morning, David and Teddy. Seasonality going into the fourth quarter; obviously you've have said that it is usually a lower volume quarter. It seems, just from what I'm looking at, it has become somewhat more pronouns.

Am I right about that, at least for the last four quarters in terms of seasonality being more pronounced? And do you think that is a trend or has that just happened to occur in the fourth quarter the last two years?

Todd, if you go back and look at a broader range of history you will see that the fourth quarter has tended to be maybe 5% lighter than the second and third quarters. We have mentioned in the last couple of years that quarterly predictions have become a whole lot harder to make as the demand patterns have shifted.

Last year's fourth quarter was surprisingly low. This year's fourth quarter was pretty much typical with other prior years, but we are not ready to say that we can expect the normal shape of the quarters going forward.

Got it. I appreciate that historical color, Teddy.

This is a nit, but I'll ask it anyway. In the real estate business had a couple hundred thousand dollars less of profit this time than you have been running per quarter. Is there anything there?

No, Todd, there is not. If you go back and look at last year's fourth quarter you will see the same thing. It is just the way it shakes out. The best thing to do on that foundry part of the business is to look at the annual number and that is what it is going to be year after year.

Okay, that is all I had. Thanks, guys.

Dmitry Silversteyn, Longbow Research.

Good morning, everybody, and thanks for taking my question. You have talked about sort of the end of the year as seeing good volume growth there and you mentioned that you expect your business to do a little bit better than the industry overall, talking about 1% to 2% longer term.

Last year in the first half you had a mid-single-digit decline in volumes in the first half of the year, so from what I remember there wasn't anything specific that took place there. It was just some of the vagaries of the higher volatility that you keep referring to. But should we expect the first half of 2013 to be a fairly easy comp in terms of volumes?

Dmitry, when I look at the data in the first half of this year we had more business than we did in the second half, so I think that the comps will be pretty tough.

Year over year, not at sequential first half versus second half.

The whole year versus a whole year?

If you look at the first -- maybe my numbers are wrong, but if I was looking back at my model you had sort of a mid-single-digit decline in volumes in the first half of the year which were offset by pretty strong pricing and mix. So my thinking is (inaudible) in the first half of this year, if you just have a normal market you should have a positive volume growth, maybe at the magnitude that you saw in the fourth quarter or thereabouts.

Is that the right way to think about it or is there going to be some volume challenges that are seasonal rather than sequential?

Again, I circle back to one of the comments I made. It is really tough for us to cut it in the quarter to answer your question. The easier thing for us to communicate is we have plans to beat that 2% a couple points, so if you start with the annual number I am confident on that. As far as how a quarter is going to shake out versus another one, I just can't help on that one.

I understand that. Question on pricing though, maybe you can be a little bit more helpful there.

You had close to double-digit price increases or price mix currency in the first half of 2012. Currency should be a fairly mutual event the way I look at it. Are you seeing any pressure on pricing, given that base oil has come down, your customers are required to take a price cut, at least in the DIY channel? Has there been pressure on your pricing and should we expect that to be a detractor from the overall revenue growth through 2013, or at least through the first half of it?

Dmitry, I think fundamental to your statement is that we are seeing raw materials decline and that is not our view. We expect raw materials to be fairly flat into the first half of this year and we don't see any change to the industry fundamentals.

So is raw materials flat on a year-over-year basis implying that the declines we are seeing sequentially are still reflected in the higher year-over-year levels? Or are you saying that -- I'm talking about base oil here. Or are you saying that the price increases that you are still seeing from your other raw material suppliers, including sort of the merchant additive guys out there, that overall your raw material basket is going to be flat?

That is right. The overall basket is what we are talking about being essentially flat.

Got it. But you are not -- I guess the reason I'm asking the question, Teddy, and I apologize for beating a dead horse maybe here, but typically everybody in this industry gets pricing as long as the guy in front of him can get pricing and then it kind of works that way when prices are unwound. We know that the oil blenders are keeping up pricing in the retail channel in 2013, so they are becoming more vocal in asking for price cuts from you guys?

I will just repeat sort of what I said that we don't see any change in the fundamentals to the petroleum additives industry dynamics today, and we are just not going to talk more specific about customer price action.

Okay, fair enough. Can you talk a little bit about the fourth-quarter tax rate adjustment; was it just sort of a normal end of the year catch up? And what your expectation for tax rate is for 2013?

Yes, I can talk to that. On the face of the press release you will see that we had a tax benefit associated with the special dividend, so if you take that out you will see a more normal tax rate. I use 32% for the whole year; 31%, 32% for my planning base and then our guys work hard to come in lower than that.

Got it. Okay, that is what I needed to know. Thank you.

[Max Faulk], PPM America.

Thanks for taking the question. My first question was more -- I know you mentioned that you don't really see any major significant fundamental changes. But are you seeing any effect or do you foresee any effect of the extension of driveline oil interval changes impacting your shipments?

Just like the 1%, 1.5% decline in shipments this year, is that coming from that kind of industry dynamic at all or can you add color to that?

I would tell you that any changes to service intervals is built into the view of 1% to 2% industry growth, so that is a factor that contributes to our view on the market growth.

Got you. Thank you. Then my last question was just, again, smaller. Are there any plans for more development Foundry Park related to either CapEx project finance or balance sheet finance?

On the CapEx side we have room on the Foundry Park area for one more Foundry Park one-sized projects. We are patient in looking for the right partner there or tenant to work with, and there is nothing on the near-term horizon bear. I don't anticipate any action anytime soon on additional project, but that can certainly change.

And you said that I would be funded with cash not separate mortgage financing or anything like that?

Most likely.

Thank you very much.

It seems there are no further questions at this time. I would like to turn the floor back over for closing comments.

Thanks, everyone, for joining us. We will talk to you next quarter. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time and thank you very much for your participation.