NewMarket Corp (NEU) 2013 Q4 法說會逐字稿

Greetings. Welcome to the NewMarket Corporation fourth-quarter 2013 and year-end financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Fiorenza. Thank you, Mr. Fiorenza. You may now begin.

Thanks, Rob. Thanks everyone for joining Teddy and me today to discuss our fourth quarter and year-end performance. 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 those risk factors can be found in our 2012 10-K.

We intend to file our 10-K toward the end of February. It will contain significantly more details on the operations and performance of our Company. Please take time to review it, as it is very informative, and represents the hard work of many of our finance team members.

I will be referring to the data that was included in last night's release. For the most part, I will focus on the performance of the fourth quarter. All comparisons I mention will be the fourth quarter of 2013 to the fourth quarter of 2012, unless I indicate otherwise.

We had an excellent fourth quarter, and as a matter of fact it was a record for our fourth quarter. Our net income was $54 million, which calculates to earnings per share of $4.08.

These results reflect record operating profit by our petroleum additive segment. Net income for the fourth quarter of 2012 was $53.1 million, or $3.94 per share.

As a result of the sale of the assets of Foundry Park, our real estate development segment in 2013, we reclassified the results of operations in current and prior year periods to discontinued operations. The effects on net income of these and other special items are presented in the summary of earnings table in the press release.

Excluding the special items detailed on that schedule from all periods, earnings for this year's fourth quarter would have been $53 million, or $4.01 a share, which is an increase of 15% compared to last year.

Petroleum additives operating profit for the quarter was $80 million, an improvement of 12% over last year. Sales for the quarter increased 8% to $554 million compared to sales last year of $511 million, reflecting the benefit of 8% higher shipments.

Our petroleum additives business continues to deliver excellent results. The increase in revenue in petroleum additives in the quarterly comparison was almost entirely driven by increase in shipments. Of the $42 million improvement in revenue, higher shipments accounted for $46 million, with price mix and currency being somewhat negative.

A couple of other items of note for the quarter were income taxes and cash generation and usage. You will note that the effective tax rate for the quarter was 25.8%, which is historically low for our business. If you look at the yearly rate, it was 29%, which is more in line with what you should expect on an ongoing basis.

During the fourth quarter, when all the variables are known, we true it up for the year. During the first three quarters, we use estimates. In other words, our annual number is a much more indicative of our overall tax burden than any one quarter.

That being said, as we speak, Congress has not yet renewed the tax credit for R&D for 2014. If Congress does not pass the credit, each quarter next year will have an additional tax, which represents the absence of that credit.

We get about $3 million a year of R&D credits. This seems to be a bit of a pattern though, where Congress eventually passes the credit, but often is late in the year and made retroactive to the beginning.

On a cash flow, items of note include paying $14 million or so of taxes associated with the third-quarter sale of the building I just mentioned, repurchasing $55 million of our stock, funding our dividends and capital expenditures. We ended the year and the quarter with very low leverage, with debt-to-EBITDA below 1. We purchased 169,800 shares in the fourth quarter at an average price of $323.21 a share.

I believe that covers the items of the fourth quarter that I wanted to cover. So now I'll make a few comments on the year.

The statistics for the total year are detailed in the press release, so I will not read them. It was a very good year, with the Company posting record earnings in petroleum additives segment.

As a matter of fact, it posted its 10th consecutive record operating profit -- 10th year. Petroleum additives shipments increased 4% for the year, which is within our long-term expectations of our performance in this market.

We continue to invest heavily in R&D and personnel to execute our business plan, and believe that plan is good for our customers and all of the other NewMarket stakeholders. Our ability to continue to provide our customers with innovative solutions and products to meet their business needs is evidenced by the 16% increase in R&D in 2013. That increased spending will continue in 2014.

Capital expenditures grew by about 50% in 2013, in support of our growth efforts and to allow us to improve our service levels to our customers. We are pleased to have received an investment grade rating from S&P during the quarter.

We now have all three major credit agencies acknowledging the excellent performance of our business with this rating of our debt obligations. Our business continues to generate strong cash flows, and this was supplemented in 2013 by the proceeds from the sale of the assets of our Foundry Park real estate development segment, from which we netted about $126 million.

During 2013 we paid dividends of $50 million, funded capital expenditures of $59 million, reduced our revolver debt by $75 million, and repurchased $96 million of our stock at an average price of $293 a share. During the year, we posted the dividend increase in April from $0.75 a share to $0.90 a share, and then again in January it was raised to $1.10 per share.

At the end of 2013, we have $154 million remaining on our stock authorization from our Board, which expires at the end of 2014. For 2014, we expect to see an increase in capital expenditures to the $100 million to $120 million range.

This includes the anticipated spending on our new manufacturing facility in Singapore, as well as several improvements to our manufacturing and R&D infrastructure around the world. We expect capital expenditures to remain in a higher than normal range for each of the next several years in support of our business.

Phase I of the Singapore facility is expected to be completed in late 2015, with an investment in excess of $100 million. The significant capital spending for the project will begin around midyear this year and continue through 2015.

The initial capacity will represent a modest increase in our overall global production, but will enable us to strengthen our business continuity capabilities and provide quick and effective service to our customers in Asia, India, and the Middle East. The facility will be scalable to allow for growth as demand warrants.

We expect Phase I to be followed with more investments in new manufacturing units over the following years. We continue to have expectations that our petroleum additive segment will deliver solid results in 2014, after having posted record operating profit for each of the last 10 years.

I know I already mentioned that, but it's worth repeating in my opinion. We mentioned that petroleum additives market shipment demand will continue to grow at an average annual rate of 1% to 2% over the next five years, as there has been no significant change in the fundamentals for the demand of this business.

Over the long term, we plan to exceed that industry growth rate. Over the past several years, we have made significant investments to expand our capabilities around the world.

These investments have been in people, technology, technical centers, and production capacity. We intend to use these new capabilities, along with the new investments mentioned above, to improve our ability to deliver the goods and services that our customers value, and to expand our business and improve profits.

Our business continues to generate significant amounts of cash beyond what is necessary for the expansion and growth of our current offerings. We regularly review the many internal opportunities we have to utilize this cash, both from a geographic and product-line perspective.

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 in 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 patiently evaluate any future opportunities.

We will continue to evaluate all alternative use of that cash to enhance shareholder value, including stock repurchases and dividend. I believe that's the end of my planned comments. Rob, can we open up the line for some questions?

Sure, Mr. Fiorenza.

(Operator Instructions)

Our first question comes from the line of Todd Vencil of Sterne Agee. Please proceed with your question.

Good morning, Dave and Teddy.

Good morning.

Good morning, Todd.

Feels like the volume growth after being a little lackluster in the first half picked up in the third quarter and a little more in the fourth quarter. Can you talk about maybe whether it feels that way, or whether this is just noise and what you're seeing there?

Sure, Todd. It's -- and I think we've expressed in the past that it's pretty hard for us to read anything into a single quarter, or even a couple of quarters, in terms of a trend. We just see balance in our quarters.

We did mention that we think the industry volume outlook remains unchanged in the -- I'll say 2% range -- of growth a year. The industry as a whole is coming off of a few weak years in the 2009, 2012 kind of timeframe.

My gut feel is that industry growth is pretty solid right now, and I'm encouraged by what I'm hearing about the worldwide marketplace. There's weak spots, there's strong spots, but overall, I feel pretty good about where our market is right now and our place in it.

That's fantastic. On the pricing front, are you guys looking at anything? Or can you see anything that's going to suggest a direction there over the next year or so? Or does everything look pretty much flattish?

Todd, as we discussed before, you should think of pricing as pass-through. But last year was very, very benign on raw materials.

And the only other thing on pricing is when we introduce new products into the marketplace, and then we deal with the pricing of their value to those. But to answer your question directly, I would expect it to be pretty quiet in the next period of time.

Got it, thanks, Dave. And then final one from me. You mentioned -- you gave us guidance on the CapEx for the year, appreciate that. And then you said it's going to remain elevated. Should we expect it to be in that triple-digit millions range for the next couple of years, or is it not going to be quite that high?

Yes, I think that would be -- you should think it would be in that $80 million to $100 million range for the next several years, yes.

Okay. With maybe a little bit higher in 2014?

2014 probably would be on the upper end of that range, yes.

Got it. Okay, thanks.

You're welcome.

Your next question is from the line of Ivan Marcuse with KeyBanc. Please go ahead with your question.

Hi. Thanks for taking my questions. Real quick, raw material trends. Those continued to -- I think you may have just talked about this, but raw material trends quarter to quarter. It's been pretty stable, and you've seen base oil come down. So would you expect that to be a little bit of a tailwind in the first half of the year, or how do you think about it?

When we look at our raw material experience last year, and I'll answer part of your question in a second, it was one of the quietest years I can remember on raw materials. And yes, you're right, some things go down, other things go up. So in the fourth quarter, it was very quiet for us.

Great, and then looking out, because I know there's been some decreases in base oil over the -- announcements. Do you see that flowing through in the first half of the year? Or is there other stuff that's going up that's going offset that so it should be, from what you can tell right now, remain pretty benign?

All I can tell you is our planning base and our best view is it will be very quiet again in 2015 -- in 2014.

Great. And I understand the R&D spend, you've got to spend money to make money. But would you expect that spend of in the mid-teens to at least remain, at least for a full year, that trying to remain over 2014, 2015, or do you think that spending comes in? Or is there are couple things that needed to be done this year that may not -- maybe does not have to be done next year?

Are you asking about the rate of increase?

Yes. So you spent 16% more dollars, is that what you said in your release?

Right, right, right. Okay. We anticipate spending more this year, but I wouldn't see -- I wouldn't expect it to be the same kind of percent increase.

Great. And then there's been a lot of chatter about Europe stabilizing, demand's not increasing all that much. But have you seen a European -- if you go through your different regions -- are European volumes getting a little bit more stable or improving from what you can tell?

And is there -- and then how is South America looking in regards to you? Because I know that's been a fairly strong point, a strong region.

Yes. As you know, we now will be publishing that in the 10-K. And when you see that, you'll see that Europe had a very good year. In our numbers, Europe is Europe, Middle East, Asia, Africa, but 8%, 9%, 10% kind of revenue improvements.

Asia had another very good year. North America was relatively flattish, which is what you expect. And then Latin America was down somewhat.

Why would you think -- why would Europe be -- you had such a strong year there, because everyone else chemicals-wise, it's maybe stable, but it's been generally down. What do you think is different for you versus maybe the industry overall?

In Latin America?

Europe.

Europe. I don't know the answer to that, Ivan. And by the way, I had said India a minute ago. I meant Asia when I was talking about the region. It's the other way around, I'm sorry. I had it backwards again. I can't attribute to any one thing, other than that region includes a pretty big expansive, geographic area.

Got you. Great quarter. I'll talk to you soon.

Thank you.

Thank you.

Your next question is from the line of Dmitry Silversteyn with Longbow. Please proceed with your question.

Good morning, guys. Couple of questions, if I may. First of all, in the fourth quarter results, the offsetting foreign exchange and pricing that was down a little bit in offsetting looked to be very strong volumes. Was it mostly foreign exchange or was it mostly price?

Can you give us an idea on there? And on the price, was it mix or was it an outright price decline?

Yes, I'm looking for that. I think each of them was about $2 million. So they were both very, very small. And it is mix.

It's $2 million. So it's mix, not so much price, okay.

Right.

The expansion in Singapore and Asia, I know you mentioned that it adds relatively little to your global supply or your global capacity, but as you know, there's other players in the region that are expanding their capacities in Asia as well. As you look at the areas, at the products that you're bringing online and at the product groups that your competitors are bringing online, is there concern that that capacity in the region, at least temporarily, may be a little excessive? Or are you playing in different enough sand boxes with these capacity expansions where you should not be stepping on each other's toes?

A couple of comments on that. We really do price on value, and with all of the investments we've been making in technology, that will continue to be the case.

I will point out, though, that just from an overall supply and demand standpoint in the industry, even with modest 1% to 2% industry growth, the industry does need new capacity. And we don't foresee any significant change in the supply and demand balance based on announced and existing new capacity.

Okay, fair enough. You are spending a lot on R&D, and justifiably so, in this, what I would (inaudible) industry. Can you update us on the productivity of R&D?

How will you keep track of it? Some people talk about vitality index or sales from recently launched products. Is there a metric that you track your R&D productivity on? And can you give us an idea of how that metric has changed over the last couple of years?

We use a number of metrics. One of the more common ones is the percent of sales from new products, and I believe about half of our products sold in 2013 were developed in the last five years.

We're pleased with the productivity of our technology investment. We've expanded our technical capabilities around the world with more capability in Asia in particular, Japan and China. And I'm confident in our team to continue to be able to use the investment we make in them very wisely.

Very good. And then final question. Try to revisit the first question that was asked on the call, the strength in volumes in the second half of the year. It's two quarters in a row that volumes have been pretty strong in the third and fourth quarter.

I'm just wondering if that's a particular market that's doing well for you, whether it's passenger vehicles, or stationery, or non-passenger transportation? Is it some share gains in your existing markets? What -- how sustainable is this improvement that you've seen?

Can we at least see it carry over into the first half of 2014? Or maybe there's been some pre-buying ahead of anticipated price increases. I'm not sure. I'm just trying to understand how an industry, as you say, that's growing at 1% to 2%, and your long-term growth rate is at 4%, can deliver 8% to 9% volume quarter and a 6% volume quarter the quarter before.

I think you just answered your own question with the last comments. It's not an 8% growth industry. And we just, to really dig into it, we would have to go back and explain those quarters in 2012 versus the year before.

We just see variation in the quarterly shipments. And there's a lot of reasons behind them, and no one reason in particular to explain it.

I did say I'm feeling good about the health of our customers and the overall volume direction of the industry. But it's certainly not an 8% growth market, nor are our aspirations to grow at that rate ad infinitum.

Okay. One more question, I apologize. You haven't done an acquisition since [the PolarTech] in 2012. Can you talk about your acquisition pipeline and your outlook for 2014?

Sure. The high-level answer is, we have nothing new to report. And we'll continue to stress patience.

Digging beyond that, we have a lot of activity going on around identifying candidates in petroleum additives and seeing which ones are the best fit and trying to develop some channels to get things going. But we have nothing new to report on the acquisition pipeline.

Okay. Thank you very much. That's all the questions I have.

Thank you.

(Operator Instructions)

The next question is from the line of Edward Yang of Oppenheimer. Please go ahead with your question.

Hi, good morning. Maybe just start with Dave with some modeling questions. On the interest expense, is $4 million a quarter a good run rate? I would have expected interest expense to have come down in the fourth quarter, given your net debt position.

Yes, the fourth quarter is the kind of interest we have in one quarter with no revolvers drawn.

Okay, but for 2014, first quarter of 2014, would that be around $4 million as well?

Yes, whatever it was, yes. Whatever it was in the fourth quarter. $4.1 million, yes.

Okay. On the R&D side, Teddy, you mentioned you're continuing to increase the spending there. Do you look at that R&D bucket as a percentage of revenue, or year-over-year increase? And going forward, what would that be? Over the last three years it's been going up as a percentage of revenue about 50 basis points a year.

Well, tough question to answer. We have a very thorough internal management process on R&D in terms of managing a portfolio of products.

We have a very well established system for tracking the progress of the project. We do look at macro factors like R&D as a percent of sales, but it's more driven by our view on what it takes to serve our customers and how are we going to achieve our long-term plans to grow and serve our customers with the modern products that they demand.

So it's more of a bottoms-up process in terms of how you formulate that budget?

That's right.

Okay. Just one more modeling question. The tax rate, what will that be in 2014?

I would use 30%.

30%. And just final question on supply. Teddy, you mentioned that the industry does need new capacity. So what are current utilization rates? And what do you think the percentage increase in overall industry capacity -- I know it's very hard to measure, but by 2015 when your plant comes online and [Ornight's] plant come online, what do you think overall industry capacity would have grown by, relative to where we are at the end of 2013?

I can answer that in very general terms. I don't have exact numbers, and I can give you my view on what I think the answer is.

As far as capacity utilization goes, it's really all over the map and it's a difficult question to answer because at various times certain components and parts of packages are tight. Other times the bottleneck will shift.

Overall, I would think that the industry, and we tend to run in the high-80%s as a percent range, pushing 90% of capacity. But that's more of a guess than any sort of empirical answer.

Okay.

And when I think about new capacity coming on, I think it's very consistent with the market growth, that 2% kind of range.

Okay. So 2% a year, around 4% by the end of 2015 when these plants come online, I guess? 2% for this year and 2% for next year, but my guess more step-wise?

Well, I wouldn't hold me to those numbers, but I think directionally, yes. The industry capacity is growing right along with the market growth.

Okay. That's very helpful. Thank you. I appreciate it.

Sure.

Our next question is from the line of Pat Kelly with Northcoast Research. Please go ahead with your question.

Hi. Thanks. Good morning, guys.

Good morning.

I just wanted to touch back on the strong volume growth in the quarter. I was just curious, was there any one-time type of business in there that is not expected to repeat?

Nothing comes to mind.

Nope.

Okay. Great. And just my last question was, I know you elaborated on shipment volumes by geographies for the quarter. That was very helpful. But just curious, what's your overall sentiment and outlook for 2014 by region, when you exclude North America?

Well, as we've discussed in the past, the growth is going to be in Asia, Latin America, Middle East, and India. I don't have a crystal ball on each one of those. And when I was speaking earlier about those regions, by the way, I was referring to revenue, not volume shipment.

Great, thank you. And good job on the quarter, guys.

Thank you.

Thank you.

Thank you. Ladies and gentlemen, we've reached the end of our question-and-answer session. I will turn the floor back to Mr. Fiorenza for any closing comments.

Thanks everyone for joining, and we'll talk to you next time. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.