NewMarket Corp (NEU) 2014 Q4 法說會逐字稿

Greetings, and welcome to the NewMarket Corporation's fourth-quarter 2014 and year-end financial results. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Brian Paliotti, CFO. Thank you, Mr. Paliotti, you may begin.

Thank you, Rob, and good morning. With me today are Teddy Gottwald, Chairman and CEO; and David Fiorenza, our former CFO, who will be retiring in March after 40 years of dedicated service for the Company. We are glad to have you with us today to discuss our 2014 fourth-quarter and full-year 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 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 factors can be found in our 2013 10-K.

We intend to file our 2014 10-K towards the end of February. It will contain significantly more details on the operations and performance of our Company. Please take the time to review it.

Now 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 2014 to the fourth quarter of 2013, unless I indicate otherwise.

We had an excellent fourth quarter which produced solid results. Our net income was $52.1 million, which calculates into $4.17 per share. These results reflect record fourth-quarter operating profit performance by our petroleum additive segment. Net income for the fourth quarter of 2013 was $54 million or $4.08 per share.

Earnings for the full year of 2013 includes the results from an operation of discontinued business and the related gain on the sale of the discontinued business. The effects on net income of these and certain 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 $53.7 million, or $4.30 per share, an increase of 1.3% compared with last year. Petroleum additives operating profit for the quarter was $85.5 million, an improvement of about 7% over last year's comparable quarter.

Sales for the quarter were $547.9 million, down slightly compared to the sales for the same period last year of $553.9 million. Shipments were up approximately 1%, versus Q4 of 2013. Our petroleum additives business continues to deliver solid results as we execute on our strategy.

A couple other items of note for the quarter were cash generation and usage. During the quarter, we utilized the cash generated by investing $21 million, as we execute our long-range capital plan; repurchasing $39 million of our stock; and funding $17 million of dividends. We ended the year and the quarter with very low leverage, with debt to EBITDA remaining below 1. We purchased 95,644 shares in the fourth quarter at an average price of $381.38.

I believe that covers the items in the fourth quarter that I wanted to address. So I'll now make just a few comments on the total year. The results of the total year are detailed in the press release, so I will not simply read all those to you.

It was a good year, with the Company posting solid earnings, and the petroleum additive segment posting its 10th consecutive record annual operating profit. Petroleum additive shipments increased 4.2% for the year, which is within our long-range expectations for our performance in this market.

We commit substantial resources each year to R&D to maintain and enhance our technological capabilities, to provide our customers with innovative products and solutions to meet their business needs. Those investments continued in 2014, and will increase in 2015.

Our business continues to generate strong cash flows. During 2014, we paid dividends of $59.4 million, funded capital expenditures of $59.7 million, and repurchased 664,204 shares of our stock at a cost of $248.5 million at an average price of $374.12.

At the end of 2014, we had $256.7 million remaining on our stock repurchase authorization from our Board, which expires at the end of 2016. Please note that the dividend, at $1.40 per quarter, per share, represents a ratio payout of 30% of our 2014 net income. This is in the middle of the 25% to 30% range that is our target payout.

For 2015, we expect to see an increase in the capital expenditures to approximately the $140 million range. This includes the ongoing spend 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, or about $100 million for each of the next three years to support our business.

The Singapore facility is expected to be completed late this year, with a total investment of over $100 million. We expect to have commercial production from the plant in Q1 of 2016. The initial capacity will represent a modest increase in our overall global production, but will enable us to provide quick and effective service to our Asia-Pacific customers, as well as those in India and the Middle East. This facility will be scalable to allow for growth as demand warrants, and it is likely that we will see a Phase 2 underway not long after Phase 1 is up and running.

We continue to have expectations that our petroleum additive segment will deliver solid results in 2015, after have -- having posted record operating profit for each of the last 10 years. We expect that the petroleum additive industry demand will continue to grow at an average annual rate of 1% to 2% over the next five years.

Continuing to grow is China, and it leads the growth. North America has seen solid economic growth; and, together with lower gasoline prices, this should result in more miles driven, offsetting some of the continued weakness in other regions.

Over the long-term, we plan to exceed the industry growth rate by a couple of percentage points.

As you know, the price of crude oil has dropped about 50% in the last six months, while exchange rates have also moved dramatically during this period. Some of our raw materials will see the benefit of lower crude oil pricing, although it is subject to its own demand and supply picture. Not all move as crude moves. In addition, there is generally a lag of 2 to 5 months before we see these changes in our results.

At the same time, the rapid changes in currency -- particularly the euro and the pound versus the dollar, and the yen versus the dollar -- are having a negative impact on our results. While the movements in oil and currency have been unusually large and rapid, they are not without precedent in our market. We intend to maintain our margins through this change, just as we have in recent years, and as there has been no significant change in the fundamentals of the business.

Currency and raw materials are two significant factors among many, and their impacts are managed in the normal course of our business. For this and other reasons, we don't disclose the magnitude of their impacts on our short-term results.

Over the past several years, we have made significant investments to expand our capabilities around the world. These investments have been in talent, technology, and technical centers, as well as 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 improve process.

Our business continues to generate significant amounts of cash beyond what is necessary for 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 to investigate potential acquisitions as both a use of cash and to generate shareholder value. Our primary focus in the acquisition area remains in the petroleum additives industry. It is our view that the industry will provide the greatest opportunity for a long-term 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 uses of cash to enhance shareholder value, including stock repurchases and dividends.

Rob, that's the end of my planned remarks. We can open up the line for questions, please.

(Operator Instructions). Ivan Marcuse, KeyBanc.

Brian, welcome aboard.

Thank you.

A couple quick questions. If you look at your -- the raw material basket. You talked about the movement in crude oil was going to be 2 to 5 months. So did you see any movement in the fourth quarter? Or do you anticipate seeing movement start to happen in the same quarter, then be to a bigger degree in the second quarter? I mean, first quarter to second quarter.

We expect to start to see a larger movement in the first half of next year. Sorry, 2015.

In 2009, you saw 1,000 basis points improvement in your gross margin, or roughly around there for the year-over-year basis. Would you expect -- and oil has moved about the same way. Volume is dramatically better than it was then. So why wouldn't you see that same type of improvement this year? What are some key differences, if you don't expect to see that between now and then?

Ivan, this is Teddy. Off the top of my head, I don't have an explanation of why our margin moved so much in 2009. When I look at where we are, I don't see -- I don't expect any significant changes in our margins as a result of the forces that are impacting the business right now.

We're certainly seeing downward raw materials. We're seeing negative exchange rates working against us. And we will certainly respond to these market forces. And it remains to be seen what the remainder of 2015 will look like, in terms of both oil prices and currency movements.

If everything were to -- where we stand today, where do you see as the negative delta with currency? How much did it impact the fourth quarter, and what do you expect for 2015, all else holding equal?

We don't disclose the amounts that impact us on the bottom line. Certainly on the sales line, we do comment on that.

Brian, any comments on that?

Yes, in the fourth quarter, the currency impact was a negative $11 million on revenue.

Got you. So, have the industries -- I guess I don't follow you on -- if you don't see any changes in the industry from today versus 2009, I think in 2009 you were able to hold price. It was a very rational market. And then your materials came down, so your margins exploded. And we also had an FX issue at that point as well.

So has the industry gotten more competitive, and you would expect pricing to come in a little bit more? Or has there been any key changes in customers or geographies, market share-wise? Or -- I don't know, I'm just trying to get an idea of why those margins wouldn't -- you wouldn't see the same sort of expansion if nothing has changed.

Ivan, again, I don't -- I'm not going to speculate on the changes in 2009 versus 2008. I just don't have that information handy. But it's a pretty stable and competitive industry today, and there was a lot of change in the world from 2008 to 2009. There is not that much change that we're seeing in our industry from 2014 to 2015.

Okay. And then Brian, real quick, a couple modeling questions. What are you budgeting for SG&A, R&D, looking in 2015? And then also, what's your expectations, at this current time, for a tax rate?

As I said in the remarks, we expect to continue to invest in R&D again in 2015. And from a tax rate perspective, I would use this year's rate as a good parameter for what next year would look like.

Okay, great. Thanks.

(Operator Instructions). Todd Vencil, Sterne Agee.

Brian, welcome aboard. I'll add my welcome to that. Going back to the comparisons to 2009 -- which is obviously the last time we saw oil do what it did this time -- Teddy, my recollection is you saw volumes drop off pretty sharply in 4Q 2008, while the -- as customers sat on their hands and waited to see where they were going to go. And from what you guys reported last night, it doesn't look like that happened to the same extent this time. Am I right about that?

That's right. We did see some slowdown in ordering, but not nearly the amount that we saw in that 2008, 2009 time frame.

Got it. And on the currency issue, just to come at it from a slightly different angle to make sure I understand it, I think I had somewhere in my notes that about 75% of your sales are conducted in US dollars. Am I right about that?

You are directionally right.

Okay. The direction I ought to go from there?

I don't have that number on the top of my head, but it sounds about right, Todd.

Okay, okay. That's good, thanks. And just continuing to jig around, as we all try to figure out what lower oil is going to mean. Again, from conversations with David and with you, my recollection is that you guys have chopped a lot of wood since 2008, 2009, in terms of changing the way your contract terms are, to make a closer alignment between price adjustments within the contracts, with your raw materials prices, as well as maybe shortening the overall term of the contracts in order to make pricing more responsive to changes in raws. Am I right about that, directionally?

You're right about the first part of that, about us trying to tie the contract formula-driven change in price closer to the timing of raw material changes.

Got it.

I will point out to you that we have a wide range of contracts. Some have price formulas in them; many of them don't.

Any sort of broad-brush way to think about what fraction of your contracts have price adjusters in them?

No, I'm sorry.

That's fine, that's fine. Okay. Capital allocation -- and maybe this is one for Brian, although obviously the other two, as well. Cash balance was pretty steady through the year. Net leverage was pretty steady through the year.

It kind of feels like you guys have moved into a mode of -- I don't want to put words in your mouth. But it kind of feels like you are targeting that, and buying back stock with any excess cash over what you are using for investment. Is that a fair way to think about it?

I think it's fair. We would like to maintain debt to EBITDA in the 1X range, all things being equal. And certainly stock repurchases are the biggest short-term lever we have on that.

Okay. I think that's what I've got. Nice job, guys. Thank you.

Dmitry Silversteyn, Longbow.

A couple of questions, if I may. You've given us the magnitude of foreign exchange headwind. If you look at price mix, can you provide some granularity on the fourth-quarter results, as far as price mix changes?

Yes, Dmitry, the breakdown -- this is Brian. The breakdown was currency, as I stated, 11 unfavorable, negative; price up positive 2; and shipments, plus 3.

Okay, shipments plus 3, okay. Secondly, you mentioned that you saw a little bit of hesitancy by customers in the fourth quarter, in terms of waiting for potential lower prices and holding back on purchases, not to the extent that we obviously saw in 2008. As you have January under your belts now, you have a few -- a couple of weeks, at least, of information, probably.

Are you seeing that trend accelerate? In other words, are customers holding back more than they did in the fourth quarter? Or have they resigned themselves to the prices aren't changing anytime soon, and resumed normal buying patterns?

Dmitry, we really don't watch the volumes by month, so we don't have any insight to a quarter-to-quarter variation.

But you're not hearing anything from your sales guys in the field as to why they are either exceeding or falling short of their goals?

No, the fundamentals -- we haven't seen any change in the fundamentals of the business.

Okay. The price increase that you've gotten in the fourth quarter -- that was sort of a tail end, probably, from some earlier base oil price increases that took place early in 2014. Would you expect pricing for you to be more of a headwind into 2015, and offset some of the 3% to 4%, let's say, volume growth that you expect to see?

Well, we expect, as we have stated many times, that our margins -- we're managed to the margins in the 16% to 18% range. And that's where we think they will be across the balance of the next year.

Would it be fair to say that it in 2015, given the raw material dynamics, that you're going to be at the upper end of that range?

It's hard to say at this point.

All right. You mentioned Europe, and the yen being a headwind for you. What percentage of your revenues are exposed to the euro and to the yen?

We really don't disclose those numbers.

So how would you judge what the foreign exchange headwind would be for you on 2015? Can you give us that, at least?

I guess the best way is to take a look at the fourth quarter, and the FX movement in the fourth quarter.

Okay. All right. Is the foreign exchange impact only a translational impact for you? Or does it impact your profit dollars, not on the translation, but because you are manufacturing in one region and selling in another currency?

We have a global supply chain and a global network for our business. And as you know, we sell in all regions around the world.

Okay. Let me ask this question differently. How much of your production is done in the US, versus sales denominated in US dollars?

We don't disclose that.

There's no way for me to figure out what your margin impact on foreign exchange is. Okay, thank you.

Thank you. There are no additional questions at this time.

I will turn the floor back to Mr. Paliotti for closing comments.

All right. Well, thank you, everyone, and we'll talk to you again next quarter.

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