NewMarket Corp (NEU) 2013 Q1 法說會逐字稿

Greetings and welcome to the NewMarket Corporation first-quarter 2013 financial results At this time all participants are in a listen-only mode. A 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, David Fiorenza, Chief Financial Officer for NewMarket Corporation. Thank you. Mr. Fiorenza, you may begin.

Thank you, Doug, and thank you for joining us to discuss our first-quarter performance. With me today is our CEO, Teddy Gottwald. We have a few planned comments after which we'll open the line 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 2012 10-K.

We plan to file our 10-Q before the end of April. It will contain more details on the operations of our Company. Please take the time to review it.

I will be referring to the numbers that were included in last-night's release. Net income for the first quarter was $67.8 million, or $5.07 a share, compared to income of $66.5 million, or $4.96 a share for the first quarter of last year. Earnings for both of the quarters include income from an interest rate swap, while the first quarter of last year also includes a charge for the early extinguishment of debt. The impact of these are detailed on the first page of the press release.

The first quarter of this year also includes the benefit of the booking five quarters worth of R&D tax credit. You may recall that Congress did not reinstated the R&D tax credit until January of 2013. The reinstatement was retroactive for all of 2012, but we were not allowed to book it in the 2012 results. The full 2012 credit included in our results was about $2.9 million.

When you look at the overall P&L statement for the two quarters, you will notice that they are virtually identical at the revenue and the gross profit level. Petroleum additive sales were $558 million compared to $558 million last year.

From a regional perspective, both Europe and Asia posted slight increases while North America and Latin America were slightly lower. The changes within each of these regions are not significant. In general, they were all essentially flat.

As we often report, the change in revenue was due to the positive impact of lubricant additive sales offset by lower revenue due shipments in fuel additives, lower customer price mix and adverse foreign exchange impact. Petroleum additives operating profit at $102 million exceeded $100 million for only the second quarter in our history, excluding the quarter when be booked the legal settlement. The only other quarter over $100 million was the first quarter of last year when PA made $107 million.

Our operating margin -- profit margin for petroleum additives was 18.3% for this quarter and for the rolling four quarters, ending this quarter, the operating profit margin was 16.7%. These are all within the range of our expectations of the segments performance over time.

In the quarterly comparison total shipments were about even, with higher shipments of lubricant additives offset by fuel additives. Nonetheless, selling increased volumes of higher value products resulted in a favorable impact on gross profit, which was mainly offset by conversion and other costs. As compared to the fourth quarter, or sequentially, our shipments were up 6.5%.

Our GS&A increased about $6 million for the quarter, which explains the lower operating profit compared to last year since gross profit was the same. These increases were planned and are in alignment with our long-term business plans. The increases were about the same for S&A and R&D.

During the quarter we repurchased 90,000 shares of our stock at an average price of $253.61 a share. We ended the quarter with 13.3 million shares outstanding. We have about $227 million remaining on our repurchase authorization, which is good until the end of 2014.

We had our new debt structure in place for the entire quarter. The interest expense posted for the quarter will be similar for future quarters with the exception of whatever the interest associated with the revolver borrowings will be.

Cash at the end of the quarter was $64 million, which is a decrease of $25 million from the beginning of the year. Cash flows provided from operating activities for three months were $27 million, which included a decrease of cash of $55.7 million due to higher working capital levels. From a high level the main driver of the increase in working capital was accounts receivable. There other pluses and minuses but accounts receivable was the main impact.

Our receivables picture is under control from the DSO, or day sales outstanding standpoint and the increase is mainly due to the fact that we had $46 million more revenue in the first quarter compared to the fourth quarter of last year. We spend $16.1 million on capital expenditure's and still estimate our spending for the year to be in the $80 million range for capital expenditure's. We also paid $12 million to fund dividends.

We continue to operate with very low debt leverage. Our debt-to-EBITDA ratio at the end of the quarter was about 1.1, and we have about $570 million available on our revolving line of credit, which affords us the flexibility we need to operate and grow our business.

We are very pleased with our first-quarter outstanding results. We are confident that the implementation of our strategy benefits our customers, which in turn benefits our shareholders. We have expectations that our petroleum additives segment will deliver improved results in 2013, after having posted record operating profit in each of the last several years.

While our total shipments for 2012 contracted somewhat due to many factors, including the global economy, we expect the petroleum additives shipment demand will continue to grow at the annual rate of 1% to 2% over the next several years, as there has been no significant change in the positive fundamentals of the business. We continue to plan to exceed that average growth rate.

As a global Company operating in many countries around the world, we are not immune to world economic conditions. It appears that each time we think we see signs of improvement in the economies, the results contradict us. We have been disappointed that the global economic activity is not recovered as robustly as we would like.

Our expectations for 2013 include the assumption of a modest economic recovery around the world. We do not see that recovery in any measurable fashion in the first quarter, but continue to plan our business around that is eventual recovery.

Our business continues to generate significant amounts of cash beyond what is necessary for the expansion growth of our business. We have made no changes to the priority of the use of that cash. Business growth and expansion first, acquisitions than shareholder rewards. We will continue to evaluate all uses of the cash generated by our business to enhance shareholder value.

Thank you for your time and, Doug, that's the end of my planned comments.

Thank you. (Operator Instructions)

Ivan Marcuse from KeyBanc.

Real quick, one thing you said in your planned remarks is Europe was flat year over year. I know last year it was down a little bit, but for every other company it seems to -- Europe seems to be a drag. What you think explains you ability to keep the market flat? Is this where you are at, or is it just -- if you could talk a little bit about that?

Yes, Ivan, as we've discussed a lot of times, our business is a little bit contrary to economics in the sense that people tend to maintain our cars so we didn't see a big drop off and we haven't seen certainly any big recovery. Also, when I speak Europe we always speak about how we, management, looks at the business and Europe to us is Europe and the Middle East and some other parts of the world, so maybe that's also part of it.

Got you. And then sequentially, did raw materials -- was the basket down a little bit fourth quarter versus -- first quarter versus fourth quarter?

Yes, we were talking about that earlier. Raw materials have been as a basket remarkably benign or flattish. Some are up, some are down, sequentially just very modestly lower. Very modestly. Year on year about the same, so we're not seeing big moments in raw material.

Got you. And then there's been some base oil price announcements and I know crude is bouncing around and you have some shortages in some other material, so would you expect that basket increase going through the year?

Ivan, that's a good question. Our planning base from our purchasing team is relatively flattish for the year. They do recognize what you said that some are going up, but some others are going down, so that's our planning view, relatively flat as a basket.

Right. And then your volumes were flat for the quarter on a year-over-year basis and my understanding is that market was maybe down 1% to 2%. Are you seeing the same -- would you agree with that and do you think even though your volumes are flat you're outperforming the overall market?

I think when we look at last year anecdotally, a number of our customers saw volume declines in the market in the 5% range and to this year, we've been expecting to see better recovery. Is a 1% or 2% decline number a good one? It depends on compared to what time period, but we're just not seeing the recovery that we expected. We're still expecting a good year. We're not counting on the industry turning, but a couple of percentage point improvement would be very welcomed by our customers and by us.

Great. Thank you for taking my questions.

Dmitry Silversteyn from Longbow Research.

If you look at everything outside of volume in the petroleum additives segment, it looked like it was slightly positive. I know there's foreign exchange in there and price and mix and whatnot and you talked about mix being positive. We've had some price concessions by your downstream customers in -- amongst the lube blenders. Are you experiencing any kind of pricing pressure in your markets, either in lubes or fuels?

Dmitry, we generally don't talk about out pricing, but I'm not aware of a lot of price concessions among our customers with their customers.

There was a fairly public announcement in December that in mass merchant business, at least, there was some price concessions given. What I'm driving at is, as Ivan mentioned on the earlier question, the base oil pricing is little bit more benign these days and maybe not so much in group one but certainly in group two and three, which you buy less of. And that's not as big of a contributor to your raw material basket as some of the additives but even the additives guys are talking about some softness in pricing.

I was just wondering if you are experiencing any kind of pressure for customers or if you're still selling value and able to hold onto pricing?

Yes, we're still selling value and our general answer is that the industry fundamentals haven't shifted and we're still able to price according to the value that we provide.

Okay, very good. You talked about the lube volumes and your lube additives business being up and then a few additives being down this quarter. Can you talk about what the drivers of that are and what your expectations are for these businesses going through the rest of the year?

Yes, I also made the comment that none of those movements were significant. We do have an obligation to report that sort of data, we agreed with the SEC, but it wasn't significant enough for us to draw any conclusions from that whatsoever.

Okay, so it sounds like it was just quarterly variations but not so much of a trend in --?

That is correct, and we did have that 6% plus improvement from Q4.

Okay, very good. So there's no issues with fuel additives that would make you in any way concerned about the year?

That's correct.

Okay. You've talked about targeting the emerging markets and obviously part of your [EM] sales goes into emerging markets, can you update us on your progress in Asia and Latin America as far as market opportunities and what you're doing about exploiting those?

Sure. We've expanded quite a bit in our geographic presence in terms of sales force, in terms of technical presence, and being on the ground and getting closer to the customer and understanding their needs is a critical part of it. We've spent a lot more money developing products specifically for customers in those regions and that's been helpful. We've seen significant growth in those regions over the last five years. They continue to be important to us as we look ahead.

Okay. And final question on the tax rate for the year. Given the R&D tax credits and how you're going to be accounting for them as well as other considerations, which should we expect for the balance of the year in terms of tax rate?

32%.

So that would be for the year as a whole which means --?

For Q2, Q3 and Q4 that each you should plan on 32%.

Okay, got it. 32% 2Q through 4Q. Great. And finally, you talk about M&A opportunities or wanting to get -- or accelerate your growth by some bolt-on acquisitions. Obviously you're not going to talk about anything that's brewing, but in terms of your overall market environment, seller's willingness to sell, the fit with your business, can you talk a little bit about where you are in pursuing some of these opportunities?

Happy to. We can't help but mention the word patience every time we talk about M&A. Our focus is very much on our industry from an M&A standpoint and we continue to scour the world for opportunities, talk with our business team about what's on their wish list and which ones would be the best fit. There isn't a whole lot of desire that we're aware of on the part of sellers right now, but we continue to stay abreast and try to open doors where we can.

Okay, fair enough. Thank you very much, that's all the questions I have.

Todd Vencil with Sterne Agee.

David, you and I talked a few weeks ago about -- for the pattern that you saw last year, volumes and margins from the fourth quarter to first quarter and on a somewhat smaller magnitude, it does seem to have repeated itself this year. Do you have any further thoughts or clarity about what may drive this volume pullback in the fourth quarter and that rebound in the first quarter?

Todd, I really don't. As we've talked on these calls in the past, the current demand seems to be more and more and more difficult to predict. I don't have a scientific answer to this pattern, if this is one, but it seems to have repeated itself.

Is it perhaps as simple as a destocking at your clients or would you be aware that if that was happening at the end of the year for accounting reasons or whatever?

I would just be guessing if I answer that question. I don't have visibility to why someone may or may not buy.

Got it.

I can't help you.

Okay. Can you walk through and unpack the impact of volume and price and FX as you usually do on a year over year basis?

Sure, So the impact of the shipments was a favorable $10 million; the impact of selling price, which includes mix, was negative $8 million; and foreign exchange was negative $1.5 million.

Thank you. And then you guys had put out a release regarding the retainer of advisor to look at the possibility of selling the Foundry Park building. Can you give us a little color on what the indications of interest there were and where you may be in the process?

Todd, I can't really add more than what's in the release. We are gauging the interest out there right now. There seems to be quite a bit of interest but we're still early in the process.

Fair enough. Thanks, Teddy, thanks, Dave.

Kevin Hocevar from Northcoast Research.

Dave, you guys stepped back into the stock repurchase game this quarter. You've been on the sidelines for a couple quarters, I'm just wondering what brought you back at this point?

We weigh the possibility of acquisitions, certainly, with the availability of cash and the current market price. We're been out for quite a while, as you mentioned, and it just appeared that the price of our stock has been trading in a fairly tight range in recent months, and we're comfortable with that and just compared to other choices we figured it was a good use of cash in this quarter.

Okay. And Dave, you mentioned that the SG&A spending has been up in the first quarter for planned reasons. Just wondering, should we expect that to carry forward into the following quarters? And should SG&A then be higher as a percentage of sales this year than it was last year?

I don't know about the percent of sales, but we aren't going to back off of the spend rates you saw in the first quarter. So it's our expecta -- my expectation that the spending in S&A and R&D will be higher, more than inflationary because we're adding people and we're adding test facilities and we're adding capabilities and that will result, obviously, in higher costs hitting the P&L.

Thanks, guys, very much.

Edward Yang from Oppenheimer.

Hello, hi, this is [Luis Amadeo] sitting in for Ed. I'm sure you have been asked this before but given the current environment where volumes have been flattish, do you still think that capacity additions by you and others are needed and could there be any the supply/demand balance?

Sure, we make decisions on capacity additions, looking at longer-term trends and I would reckon that our competitors do, as well. Our view on the industry growth hasn't changed, we still see it in the 1% to 2% a year range, despite the weakness or lack of growth over the last year. Our view on the future hasn't changed in the industry. We'll need small incremental additions to capacity going forward so no change there.

Okay, fair enough, thank you very much.

(Operator Instructions)

Our next question is a follow-up question from the line of Ivan Marcuse.

You said in your base assumptions looking out into 2013 that you're expecting some sort of modest recovery in your overall markets and you didn't say that in the first quarter and who knows if it actually happens, but then that also implies that you're -- you said that you expect earnings to get a little better. If we don't see any recovery in volumes and stay in this sort of benign, will you still be able to increase your earnings on a year-over-year basis, or do you need a volume pickup?

No, our expectation is that we'll have a better year this year over last even if volume doesn't pick up from where it is today.

Great, and then a quick question. Interest expense, $5 million, is that a run rate to use going forward on a quarterly basis?

Yes, that would be a good number to use.

Got you, thank you.

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

Thanks, everyone, for joining us, and we'll talk to you next quarter. Have a good day.

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