NewMarket Corp (NEU) 2015 Q1 法說會逐字稿

Greetings and welcome to the NewMarket Corporation first-quarter 2015 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. Brian Paliotti, Chief Financial Officer from NewMarket Corporation. Thank you. You may begin.

Thank you, Diego, and thank you to everyone for joining us this afternoon. With me today is Teddy Gottwald, our CEO.

As a reminder, some of the statements made during this conference calls may be forward looking. Relative factors that could cause actual results to differ materially from those forward-looking statements are contained in our earnings release and in our SEC filings, included in our most recent Form 10-K.

During this call, we may also discuss non-GAAP financial measures included in our earnings release. The earnings release, which can be found on our website, includes a reconciliation of these non-GAAP financial measures to comparable GAAP financial measures. 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 $64 million or $5.14 a share, compared to net income of $58 million or $4.43 a share for the first quarter of last year.

Earnings for both first-quarter periods include the impact of valuing an interest rate swap at fair value. Excluding that special item from both periods, earnings for this year's first quarter would have been $65 million or $5.26 a share. This is an earnings increase of about 11% and an EPS increase of 16% from last year's performance.

Petroleum additives' operating profit for the quarter was $105 million, which is a $9 million or 9.2% higher than last year's performance. Sales for the quarter decreased 3.4% to $555 million, compared to sales for the same period last year of $574 million. The decrease in revenue in petroleum additives in the quarterly comparison was primarily driven by foreign exchange.

We did achieve record Q1 shipments, which represented a 1.5% increase versus a very strong Q1 of 2014. The shipments are characterized by a small reduction in lubricant additives, offset by an increase in fuel additives.

Of the $19 million reduction in revenue, FX accounted for more than the entire decline at $21 million. The biggest impacts came from the euro and yen rates versus the US dollar. Higher shipments and price mix were the favorable offsets to the FX impact.

In the first quarter, we saw a substantial benefit from lower raw material costs, offset somewhat by foreign-exchange impacts I just described. As we have said before, we tend to see a short-term raw material benefit when crude oil drops and a penalty when it moves up.

Many, but not all, of our raw materials move in the same direction as crude, often following behind crude changes by two to five months. While the last several months have seen unusual large swings in crude oil and exchange rate, managing through such changes are a normal part of our business.

We expect margins to be in the mid to upper teens over the longer-range term and we have seen this in recent years.

On to the cash flow for the quarter, items of note including our funding of normal dividends of $17 million and using more cash to fund the normal variations in working capital. We bought back a nominal 2,600 shares or $1 million of stock back in the quarter. We continue to operate with very low leverage, with debt to EBITDA remaining below 1.

For 2015, we expect to see an increase in the level of our capital expenditures to the $100 million to $140 million range, 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 globe. In Q1, we ramped up that spending to $20 million.

We expect capital expenditures to remain in a higher-than-normal range for each of the next several years or in the $80 million to $120 million range in support of our growth plans. This is no change from the position we discussed at the end of 2014.

Over the past several years, we had 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.

Diego, that concludes our planned comments. We would like to open up the lines for any questions, please.

(Operator Instructions). Dmitry Silversteyn, Longbow Research.

Congratulations on a great start to the year. A couple of questions. First of all, you talked about raw materials being a 21 -- I'm sorry, not the raw materials -- foreign exchange being a $21 million headwind, so that comes out to be about 3.7% or so downside. The remaining 1.2% or so price mix being negative, is that -- was that mainly price or mainly mix that was a negative comp year over year?

The reduction in revenue was $20 million and FX was $21 million of the entire change.

I understand that, but you also had a 1.5% improvement in volume, right? Or unit shipments, as you call them. So, the price mix then by mathematics looks out to be a 4.9 million reduction -- a 4.9% reduction, I am sorry. So I am just wondering if that was price or mix or a combination of both.

It was a combination of both.

Okay, so your prices have started to move down a little bit as raw materials have given you room on margins to bring pricing down.

Yes.

Okay. Secondly, in the fourth-quarter conference call you mentioned seeing a little bit of an inventory correction by customers and you talked about that being one of the reasons [to your thought] flattish year over year in the fourth quarter. Has that trend pretty much concluded or is it accelerating or is it done with? Can you talk about customer buying patterns and what you can infer from that as far as their position in terms of their inventory [feed] or long or short your products?

Yes, I think in the first quarter what we saw is normal order patterns. I don't think we saw anything fundamentally different than we have seen in other quarters. What we talked about in the fourth quarter, we didn't see any of that as of the first quarter. We saw normal patterns.

Okay, okay. And then in terms of pricing, are you seeing any evening out or flattening out of price concessions or is that accelerating for you? And should we expect this headwind, if you will, to get stronger or pretty much stay at these levels of, let's just call it, low single digits?

I think the first quarter is a pretty good indication of what we will see across the balance of the year.

In terms of the components of revenues?

That's correct.

Okay, and then final question, and then I will get back into queue, your CapEx guidance. I think previously you talked about $100 million. On this call, you talked about $100 million to $120 million. Is that just semantics or did you find new -- more projects to invest in during 2015 and you have actually speeded up your CapEx investment this year?

No, there's nothing fundamentally different. We're continuing to look at the opportunities to grow the Company and just revising the range as far as what we see of spending going forward.

Got you, got you. Okay, thank you very much.

(Operator Instructions). Ivan Marcuse, KeyBanc Capital Markets.

Thanks for taking my questions. Real quick, how much were your raw materials down in the quarter on a year-over-year basis?

Ivan, as you know, we don't go into the details in the cost of goods sold.

Okay. If you look at your -- your R&D popped on a year-over-year basis. I know it can be lumpy quarter to quarter. Was there anything special in there or at this level of $39 million, $40 million, would you expect that to continue for the remainder of the year or how would you expect the R&D and the SG&A spend or (multiple speakers) for the year, I guess (multiple speakers)

Yes, our expectation is that the purposeful spending in both of those is exactly where we had anticipated, and across the balance of the year, we expect them to be at those levels.

Got you. And then if you look at your -- one thing I noticed is a small part of the business, but TEL or the other, that was about double what it typically has been the last several quarters. Is that just a matter of shipping or is there something in there? Or is that timing where maybe some second-quarter sales fell into the first quarter, or how would you gauge that?

Ivan, it's Teddy. As you probably are aware, those are small-volume, high-value shipments and the patterns are irregular. I wouldn't read anything into it. It's just a big, higher quarter.

Okay, so it likely goes back into that $2 million-ish type of rate that it has been in the last several quarters, correct?

Right.

Got you. And then, last question, more, I guess, modeling. What's your best guess at a tax rate for the remainder of the year? And thanks for taking my questions.

Yes, Ivan, I think the first-quarter rate is a pretty good indication. There hasn't been any movement on the R&D tax credit, so I think the first quarter pretty much represents where we think it is going to be.

Great, thanks.

Dmitry Silversteyn, Longbow Research.

Good afternoon, gentlemen. I didn't quite expect to be on the call that quickly. But I do have a question on inventory. We had some inventory reductions through 2014 for you guys, but that seems to be more business [add than anything else]. I would have expected with lower base oil pricing that you would have worked off your inventories as well, but on a year-over-year basis, that hasn't happened.

So, can you talk about -- it's hard to measure inventory when foreign exchange and raw material pricing are moving as much as they are this time around. If you were to think about it in unit volumes -- in units the way you think about your volume shipments, were your inventory units down materially year over year and sequentially, or up, or can you talk about your inventory position?

Dmitry, I think you might have answered the question. It is pretty dynamic with FX and raw materials, but as far as is there any change in the way that the inventory is viewed in the first quarter versus other quarters, in this first quarter of this year, I would say no.

But as you stated, with raw materials and FX, the inventory value, as you can see, was down a little bit quarter to quarter, but there is no difference in the pattern, same as what we see from a shipments perspective.

Okay, so if you look at units, your inventory did not go up in the quarter on (multiple speakers) in a non-seasonal way?

We didn't see anything fundamentally different in our inventory value.

Okay, very good. And then, just -- this was a calculated number for me, but it looks like you have about 12.7 million shares outstanding in the quarter, which looks to be an uptick from what you had in the second half of 2014, obviously on dilution, given the stock price. Have you buy back stock during the quarter, and if so, how much, and how much do you have left in your authorization?

Yes, the outstanding shares, Dmitry, is 12.4 million at the end of the quarter, and across the quarter --

12.4 million, okay.

12.4 million, and we spent $1 million -- approximately $1 million in the quarter and bought back approximately just a little bit north of 2,600 shares.

Okay. So that is obviously a slower pace for you than you have been doing. Is that market timing or just use of cash was different this quarter versus last? Do you expect to complete your authorization by 2016, which would imply significantly higher level of buybacks in the balance of the year?

Dmitry, we have about $250 million left on the authorization and that's good through the end of 2016. I wouldn't read too much into it. The way we -- our decision-making is still the same. We look at cash needs, internal needs, the possibility of acquisitions, and the relative price of the stock, and we make decisions based on all of those factors rolled into one. It is our desire to use the authorization before it expires at the end of 2016.

Okay. Given the high stock price, has any thought been given to a stock split? Companies in this industry haven't done it for years, but there was one major company in our industry that has announced a stock split recently. Has your Board given any thought about splitting the stock and perhaps improving the liquidity?

We talk about it periodically, and my answer on that, really, to whoever asks the question, is we will split it when we come up with a good reason to do that. If you have some thoughts on it off-line you would like to share with us, let us know, but most of the folks we talk to, most of the investors that we talk to are pretty indifferent on whether we split or not.

I wouldn't disagree with you, Teddy, given that [institutional] investors play a bigger role in the market these days and they don't care about the stock or the price as much -- or the price of the stock, I should say. The announcement that I referred to of a stock split, as you said, it was -- piqued my curiosity of thinking maybe it is coming back in vogue, so that's why I checked.

All right, thank you, guys. I will get back into queue again.

Todd Vencil, Sterne, Agee.

Jumping on the question Dmitry, I think, was getting at around the question on the share count, I am coming up with a different number on EPS than what you guys reported, once you back out, what do you call it, the swap. What was the after-tax effect on the stock, Brian? Do you know that?

I don't have that number off the top of my head, Todd.

Okay. Is it safe to assume that would probably tax at a different rate than the rest of the business?

Are you talking about the interest rate swap tax?

Yes.

Yes, it's a different rate.

Okay, that's always a plus. Okay, thanks very much.

(Operator Instructions). There appears to be no further requests for questions. I will turn the conference back over to management for closing remarks. Thank you.

Diego, thank you, and thank you, everyone, for joining, and we will talk to you again next quarter.

This concludes today's call. All parties may disconnect. Have a great day. Thank you.