NewMarket Corp (NEU) 2015 Q2 法說會逐字稿

Greetings and welcome to the NewMarket Corporation second quarter 2015 financial results earnings call. At this time all participants are in a listen-only mode. A brief 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, Mr. Brian Paliotti. Thank you, sir. You may begin.

Thank you, Adam, and thanks everyone for joining us this afternoon.

With me today is Teddy Gottwald, our Chairman and CEO.

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

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 plan to file our 10Q later today, and it contains significantly more details on the operations and the 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 $59 million or $4.72 a share compared to net income of $67 million or $5.24 a share for the second quarter of last year.

Earnings for both second-quarter periods included the impact of valuing and interest rate swap at fair value. Excluding that special item from both periods, earnings for this year's second quarter would have been $58 million or $4.65 a share compared to $68 million or $5.35 a share.

Petroleum additives operating profit for the quarter was $94 million, which is a $15 million or 13.8% lower than last year's record Q2 performance.

Total sales for the quarter decreased 9.6% to $561 million compared to sales for the same period last year of $620 million.

The decrease in revenue in petroleum additives in the quarter comparison was mainly driven by foreign exchange and shipments. The foreign exchange impacts were mainly driven by the euro and yen rates versus the U.S. dollar, which accounted for $28 million of the revenue reduction.

Our shipments for Q2 represented a 2.3% decrease versus a very strong Q2 of 2014. The shipments in lubricant additives declined primarily in the North America region but were partially offset by an increase in fuel additives globally.

Shipments accounted for $20 million of the $59 million revenue reduction.

Through the first six months of the year, our shipments are essentially unchanged versus 2014.

Lubricant additive volumes have been slower than expected, but we believe the PA industry's long-term growth rate of 1% to 2% hasn't changed and we don't see any new trend in the volume data year to date.

In the second quarter, similar to Q1, we continue to see a benefit from lower raw materials offset by the foreign exchange impact I just described.

We continue to invest in R&D in Q2 in support of our customers and increase those investments by $5 million or 13% in the quarter and by $12 million or 18% through the first half.

While in 2015 we experienced movement in crude oil and exchange rates, managing through such changes is a normal part of our business. We expect our margins to be in the mid- to upper teens over the longer term as it has been in recent years, as the fundamentals of the industry have not changed.

For the four quarters ended in June, our average PA, or petroleum additives, operating margin was 16.9%, which is in line with our expectation of performance of our business over the long term.

On to cash flow for the quarter. Items of note include funding our normal dividends of $17 million and using more cash to fund the normal variations in working capital.

We bought back 18,454 shares of our stock for $8 million in the quarter. We continue to operate with very low leverage with debt to EBITDA remaining below one.

In Q2, we continue to execute on our capital investments on identified projects which equated to $29 million, bringing the year-to-date spend to $50 million. This is in line with our full year plan for capital expenditures in the $100 million to $140 million range, which includes investing in our new manufacturing facility in Singapore as well as several important improvements to our manufacturing and R&D infrastructure around the world.

We still anticipate capital expenditures to remain in the higher than normal range for each of the next several years or in the $820 million range in support of our global growth plans. This is no change from the position we discussed over the last few quarters.

In summary, our business continues to perform well compared to a record Q2 of 2014, in a business climate marked by slower world economic growth and a strong U.S. dollar.

We are investing heavily in R&D and additional capacity to support our customers worldwide and to meet our long-term growth goals.

We remain committed to our safety-first culture to providing customer-focused, technology-driven solutions, and to a world-class supply chain to meet our customers' growing needs. And this approach will continue to be beneficial to our stakeholders.

Adam, that concludes our planned comments. We'd like to open it up for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment while we poll for questions. Ivan Marcuse with KeyBanc Capital Markets.

First question is, a lot of companies in the industrial or industrial materials, chemical spaces has pointed to, at least [have] North America as an area of strength relative to the rest of the world, where you guys have saw some weakness.

Is there, [with] miles driven sort of going in the correct trend and everything else that trends seem to be more positive, why do you think your business was weak in North America? Was it just more of a timing issue or is there something else going on?

Ivan, this is Teddy. We did see strengthening on the fuel side in North America and worldwide, mainly because of the miles driven impact you mentioned.

The weakness on the lube side, we don't read anything into it. We see it as more timing than anything else.

Okay. And then there's also a lot of chatter around China getting weaker and Asia in just general. Have you seen any sort of -- anything that's changed, I guess near-term, fundamentals in terms of production rates coming down in auto or seeing slowdown demand in any way that would influence you one direction or another?

Yes. The slowdown in auto production and sales in China is having some impact on our business. But when you look at it in the context of the total picture, it's minimal near-term impact.

China's still growing, albeit not as fast as we'd all like it to, but its still a growing market. And the near-term changes really are hard for us to measure.

Got you. And then if you look at, I guess this is probably more of a finance question. But if you look at your sales didn't really change quarter to quarter, raw materials, or at least oil and a few other things seem to have been going sideways, I guess from second quarter to first quarter, and your currencies were pretty much the same second quarter to first quarter.

Why would you gross margin compress? Is there something else that was going on or something that influenced that that maybe I'm not thinking of?

Ivan, this is Brian. I think what you're seeing is raw materials flattening or stabilizing through Q2. And the FX impact that we experienced in Q2 was marginally worse than it was in Q1.

Got you. Was there any impact on pricing or its competitive nature --

No.

-- in the industry?

Any fundamental changes, no.

Great. And then last question. Your R&D and SG&A spend, should it look pretty much the same in the second half as it did in the first half?

Yes. We're going to continue to invest in R&D in support of the customers as we have in the first half and S&A shouldn't be any material changes.

Great. So there wasn't any sort of big project or anything like that in R&D that you had to spend in the first half that you don't in the second half?

No.

Great. Thanks a lot for taking my questions. I appreciate it.

Thank you. Todd Vencil with Sterne, Agee, CRT.

Brian, following up on one of those last couple of answers there, did FX represent a headwind on margins or was it really just a top-line translation impact?

Both.

Can you give us a sense of how much margin it impacted?

I can't, Todd. I don't have that in front of me. But it was an impact on both sides, both on revenue and on margin.

Okay. All right. There was, you called out and quantified, certainly, the reduction in revenue from shipments and from currency. You didn't really call out the pricing. And obviously, it was a small impact just looking at those numbers that you gave.

Are you seeing your product prices adjusting either automatically or in the competitive market in response to the reduction in raw material cost or is that not really happening?

We've seen some of that, Todd, throughout this year with raw materials dropping, certainly.

Teddy, do you think you're getting some benefit where with the lower raws it's been a little bit margin accretive for you in a sustainable way?

Well, moving raw material cost and crude oil and foreign exchange, all of those are normal courses of business for us, and we manage through them.

We've seen more dramatic movements in both here in this year, but we are managing through them in the normal course of business. And our guidance to you about our margins being in the mid- to upper teens hasn't changed.

Got it. That's helpful. And then finally, I mean, you've been talking for a while about the higher level of CapEx over the next several years.

Can you just remind us or even expand on what you said before in terms of what sort of -- what a lot of that CapEx is going to beyond the plant that we know you've been working on in Asia for a while?

I can directionally tell you that a lot of the increase will be new capacity. It's substantial for us. It's not, certainly, enough to move the industry supply/demand picture.

But we are looking at adding beyond the current Singapore construction. And probably next time we talk, we'll have a little bit more detail for you on that.

Got it. I'll look forward to that then. Thanks a lot.

Thank you. (Operator Instructions) One moment while we poll for more questions. Dmitry Silversteyn with Longbow Research.

Just wanted to follow-up on a couple of items. First of all, on volumes, you talked about 2.3% lower shipments year over year, but you also, I think earlier in the prepared remarks or perhaps in an answer to a first question, talked about a $20 million headwind to revenue from lower volumes, which actually translates into 3.2% impact.

So am I missing something? Were you talking about lube specifically as $20 million and then there's a little bit of a growth in fuels? Is that why there's a difference between 2.3% and 3.2%?

Yes.

Okay.

Yes. And also you're talking dollars versus quantities.

Okay. So how do I understand that Brian? Does that mean that there is a price --

It'll be --

-- (inaudible) there as well?

Well, there's a mix of products that we sell. We sell a lot of products across our business.

The mix was negative as well because you sold more fuels than lubes or just within lubes mix was negative?

The mix in total was a little bit different than it was in the quarter before that we're comparing to.

So if I look at the rest of the business, so let's say we use 2.3% as the volume decline, it comes out to be about 7.4% negative, I guess for the rest of the businesses, $28 million in foreign exchange gives us about 4.5%.

So is the other 3% decline, was that price mix, is that what you're referring to basically?

That's correct.

Okay. Very good. And then to follow up on the question about the sequential drop in margins, you talked about that being more a function of foreign exchange than anything else, although you did mention that pricing has been coming down throughout the year.

Can you talk about why declining -- why foreign exchange had such a big impact on margins? Especially since, again, sequentially there just was not that big of a change, certainly not as big as year over year on foreign exchange. Are you sourcing and selling in different currencies? Is that what's going on?

Yes. I mean, we have a mix from a product perspective and from a geographic mix perspective as we go quarter to quarter which drives that change.

Okay. So does that mean you're basically sourcing more in the U.S. versus your revenue distribution? Is that the way to think about that?

Yes, that is the way to think about it.

Okay. And then final question. Just you talked on and off about M&A and sort of continuing to maintain a pretty healthy pipeline.

Any updates there as far as progress, whether you want to talk about sort of general market conditions or seller expectations or buyer expectations?

It just seems that there's a lot more activity recently, at least globally, in the lube and fuel additives area. Should we be expecting anything in the near future?

We're continuing to look for opportunities. We have a strong desire for acquisitions in petroleum additives, but we don't have anything new to report to you.

Okay. Is it possible, given the technologies that you possess in house and the expertise in additive manufacture that these could be applicable into markets and industries beyond lube additives?

Well, certainly beyond the product lines and markets that we're in today. And we're constantly looking at opportunities to expand into adjacent spaces. But most of them I would still call lubricant additives or fuel additives.

There's some applications beyond that, but most of our focus is on the markets we know or that are close by.

Got you, Eddie (sic). And just to sort of finish clarifying that point. This year environment versus last year environment, are things getting better, worse from multiple point of view, from sellers being ready to sell? Anything going on that you can provide some color on?

Well, it's a small universe that we're in. But I would expect it to be reflective of the rest of the M&A market.

So still a disconnect between what buyers are willing to pay and what sellers think their businesses are worth?

I suppose you could say that, yes.

Thank you Eddie. Teddy. Sorry.

Sure.

Thank you. Our next question is a follow-up from the line of Ivan Marcuse with KeyBanc Capital Markets.

Great. Just a real quick question on the gross margin. So as you look forward and things sort of stay -- if currency sort of stays where it is now, is there any sort of seasonal impact in the back half that would impact gross margin one way or another, similar to what we saw from first quarter to second quarter? Or should we sort of think gross margin back in this -- it's always sort of been in this 28% to 30% range for the past several years. Is that where you'd peg it versus the 32% that you saw in the first quarter?

Yes, I think the long-term average which you stated is probably closer to where we think it'd be.

Great. All right. Thanks a lot.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to Brian Paliotti for closing remarks.

Thanks everyone for calling in, and we'll talk to you next quarter.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.