NewMarket Corp (NEU) 2014 Q1 法說會逐字稿

Greetings and welcome to the NewMarket Corporation first-quarter 2014 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, David Fiorenza. Thank you. You may begin.

Thank you, Brenda, and thanks to everyone for joining us this afternoon. Teddy and I are here today to discuss our first-quarter 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 2013 10-K.

We intend to file our 10-Q toward the end of April. It will contain significantly more details on the operations and performance of the Company. Please take time to review it.

Our comments today will be referring to the data that was included in last night's press release.

Net income was $57.5 million, or $4.43 a share, compared to net income of $67.8 million, or $5.07 a share, for the first quarter of last year. Earnings for both first-quarter periods includes the impact of valuing an interest rate swap at fair value, while the first quarter of last year also included income from operations of a discontinued business. The summary of earnings in the press release reflects that data with and without those items.

Excluding those special items from both periods, earnings for this year's first quarter would have been $58.9 million, or $4.54 a share. This is an earnings reduction of about 11% from last year's near record performance.

Petroleum additives operating profit for the quarter was $96.2 million, which is $5.8 million, or 5.7% lower than last year's excellent performance. Sales for the quarter increased 2.8% to $574 million compared to sales for the same period last year of $558 million, reflecting the benefit of 5.9% higher shipments. This revenue was a first-quarter record for our petroleum additives business.

The increase in revenue in petroleum additives in the quarterly comparison was mainly driven by increased shipments in lubricant additives, a small reduction in fuel additives. Of the $15.6 million improvement in revenue, higher shipments accounted for $23 million, with price mix and currency being the offset.

There are several items of note that you may find helpful to understand the comparative performance of the quarters and thereby put them in better perspective. I'd like to highlight three of them -- foreign exchange, product mix, and income taxes.

As a global business, we are impacted by changes in the exchange rate when we remeasure our profits into US dollars. Our petroleum additive results for this quarter included a small unfavorable impact due to rates, but last year's first quarter included a relatively large favorable impact.

The difference in the quarterly comparison is in the pretax $5 million to $6 million range. It is not our position to actively hedge foreign exchange rates. We take a long-term view of the business and believe we will benefit in some quarters and lose in others. We do review this position periodically.

As you might expect, our customers' near-term demand determines the mix of business we sell in any given quarter. This usually evens out over larger periods of time. This is why we often describe a range of mid-to-upper teens operating profits when we discuss our business. While demand was strong in the quarter, the mix of products sold was unfavorable compared to last year's first quarter.

Regarding income taxes, you will note that the effective tax rate for the quarter was about 31.4%, while the effective tax rate in last year's first quarter was 27.6%. In our last conference call we discussed the impact that the R&D credit can have on our results. This year's first-quarter taxes include no benefit for this credit, as Congress has not yet voted to extend this benefit for 2014.

Comparatively, last year's first quarter included all of the benefit for 2012 in one quarter of 2013. If you take this change in the effective tax rates in this year's pretax earnings meaning the delta and effective tax rates times pretax earnings, you'll see this is in the $3 million unfavorable impact.

I hope that discussion was helpful.

We are pleased with the performance of the business in the first quarter and we're off to a good start for the year.

On cash flow for the quarter, items of note include funding our normal dividend, repurchasing $81 million of our stock, and using more cash to fund the normal variation in working capital. We continue to operate with very low leverage, with debt to EBITDA remaining below 1.

During the quarter we repurchased 232,200 shares of our stock at a cost of about $81 million, averaging about $351 a share.

For 2014, we expect to see an increase in the level of our capital expenditures, which 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. This is no change from the position we discussed at the end of the year.

We continue to have expectations that our petroleum additives segment will again deliver solid results in 2014. We expect 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 have been no significant change in the fundamentals of the business.

Over the long term, we plan to exceed the 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. And we intend to use those new capabilities, along with the new investments mentioned, to improve our ability to deliver the goods and services that our customers value, and to grow shareholder value.

Our business continues to generate significant amounts of cash beyond what is necessary for the expansion and growth of our current offerings. We continue to assess the many internal opportunities we have to utilize this cash, both from a geographic and product line perspective, and continue our search for acquisitions in the petroleum additives industry. We expect that we will continue to repurchase shares in 2014.

Brenda, that concludes our planned comments. We'd like to open up the lines for any questions, please.

Certainly. (Operator Instructions) Edward Yang; Oppenheimer.

Just starting with the margin, margins were down 150 basis points year over year in petroleum additives. Would you classify that as more noise? You mentioned unfavorable product mix. Some other companies have mentioned weather as well. But I would like to understand some of the volatility around margins.

Yes, Edward, that's a good question. This time it was driven by the mix of business that I addressed in my planned comments.

And, David, what do you mean by product mix? Is it just more engine oil versus driveline or industrial, or -- ?

Yes, directionally that's exactly correct, that you may sell more -- you may have more demand for a product at one end of a range of profitability and less at the other end. But, as I mentioned in my comments, those tend to level out over longer periods of time.

Okay. And do you think some of that will reverse in the subsequent quarters, some (multiple speakers) --

Quarters, yes. Yes. I would expect that, yes.

Okay. And moving to the shipment side of the equation, almost 6% shipment growth. That was pretty robust. You mentioned that the industry grows at 1% and 2%. So could you provide some color in terms of the strength there, above and beyond what the industry's growing?

Edward, this is Teddy. To begin with, it is our view that the industry over time will grow at 1% to 2%. It's my view that the industry is seeing a little bit above that right now, just on the strength of some rebound in the economies around the world as they impact our customers' business. We've mentioned that 1%, 2% -- we've mentioned that as a company we aim to exceed that by a couple of percentage points. And that's certainly still our view.

Okay. Thank you, Teddy. I appreciate that.

Ivan Marcuse; KeyBanc.

Just curious, again, on the volume. So you've been growing at this mid-single-digit growth over the last three quarters. So it's been pretty strong. So, is there a certain region where you're seeing more strength than others, or a certain product line that you've gotten into recently that maybe you weren't in on the prior year? Just because you're growing at basically triple the market right now, so I'm just curious of how stable that is going forward.

From a regional standpoint, for us we've seen particular growth in our European region, which is a pretty broad region. It includes Middle East, Africa, and India, as well as the Asia-Pacific region.

Okay, gr- --

Sorry, Ivan. Any other aspects of your question?

Is there a product line or a specific or is it just more of a regional function where you're seeing the growth? So, for instance, have you gotten bigger into diesel in India or some different region versus where you may not have been prior?

I wouldn't characterize it as any one product or product in a region, no.

Great. And then, if you look at your SG&A line, you were able, at least on a year-over-year basis -- I know this is just one quarter, but you were able to keep it flat even though you had volumes rise. So how do you look at, going forward, your SG&A? Do you still expect that on an annual basis sort or to grow in that 3% to 5% type of range? And then the same question I guess for R&D. R&D over the past year I guess was up considerably in 2013 versus 2012. How are you budgeting that now for 2014 versus 2013?

Ivan, it's David. I'll take those separately. SG&A, or S&A, in a quarterly comparison is not particularly instructive. Year on year it's going to go up 3%, 4% a year. I mean, people get increases in salaries. We have programs going on. So I expect it will revert to that by the time the year is out.

On the R&D side, we tend to spend more than that range, and you've seen that in the past. And we continue to spend money on R&D in support of the demands that our customers are placing on us.

Okay, great. And then, last question, on your year-over-year revenue. $23 million was in shipments. How much was FX?

FX was actually quite benign in the quarter. It was $700,000 adverse.

Okay. Then how is the $6 million -- you may have commented on this in your and I missed it. I believe you said in your release that you had $6 million -- FX hit you by $6 million on the operating line. Was that a loan translation or --?

No, no, no. Great question, great question. What we're communicating, or trying to communicate, is that the quarter itself had a very small negative FX impact. So when you look at how much money we made this quarter, it was very small. That's consistent with the sales FX number being very small. And what we're saying is by delta you get the bigger number, because in the first quarter of last year the impact was favorable $5 million or so.

Got you. So you got a $5 million favorable last year versus this year, it's sort of a neutral event.

Direct- --

So, that's how to look at it. Got it.

Directionally that's correct.

Thank you very much.

(Operator Instructions) Todd Vencil; Sterne, Agee.

I suspect, David, that you've already answered this question, but I'll ask it this way anyway and let you answer it again. You mentioned the shift in mix was the biggest factor on the price, which I have no trouble believing. Have either one of you guys seen any kind of near-term market share shifts, anybody sort of pricing to pick up volume? Or has that all been a fairly stable kind of situation?

We're not seeing anything unusual compared with historical actions.

Got it. Thank you for that. And then, David, just to beat a little more of the dead horse on the FX and the shipments, would it be possible for you to provide the detail that you usually provide in the K, which is the roll-up of shipments and product mix versus selling prices and customer mix versus FX on the year-over-year dollar comparison (multiple speakers) --

I have 3Q to 3Q right in front of me. Is that what you want or do you want something else?

Well, 1Q to 1Q, yes.

Yes, I'm sorry, 1Q to 1Q. Did you say yes?

I did.

Okay. Lubricant additive, shipments, favorable 28.6; fuel additives, unfavorable, shipments, 5.3; pricing, customer mix, negative 7; and FX negative 0.7.

Todd Vencil Got it. Thank you so much.

Thank you. It seems that we have no further questions at this time. I'd like to turn the floor back over for any closing remarks.

Well, thanks, everyone, for joining us and we'll be talking to you next quarter. Have a good afternoon.

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