NewMarket Corp (NEU) 2015 Q3 法說會逐字稿

Greetings. And welcome to the NewMarket Corporation third quarter 2015 financial results teleconference. (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. Thank you. You may begin.

Thank you, Sharon. 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 conference 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 in our SEC filings, including 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 plan to file our 10-Q later this week, 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 $62 million or $5.08 a share, compared to the net income of $57 million or $4.53 a share for the third quarter of last year. Earnings for both third quarter periods include the impact of valuing and interest rate swap at fair value. Excluding that special item from both periods, earnings for this year's third quarter would have been $64 million or $5.25 a share, compared to $57 million or $4.52 a share.

Petroleum additives operating profit for the quarter was $101 million, which is about $7 million or 6.6% higher than last year's third quarter performance. Total sales for the quarter decreased by 8.3%, to $541 million; compared to sales for the same period last year of $590 million.

The decrease in petroleum additives revenue in the quarter comparison was mainly driven by FX and price/customer mix. The FX or foreign exchange impacts were mainly driven by the euro and yen rates versus the US dollar and accounted for $24 million of the revenue reduction, with the price/customer mix accounting for $25 million of the quarterly change, as some prices have reset. The shipments in lubricant additives have declined but were offset by increases in fuel additives globally.

In the quarter and through the first nine months of the year, our shipments were essentially unchanged versus 2014. Lubricant additives volumes have been slower than expected, but we believe the petroleum additives industry 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 third quarter, similar to the first half, we continue to see a benefit from lower raw material costs, offset by the foreign exchange. We continue to invest in research and development in Q3 in support of our customer solutions and have increased those investments by $3 million or 9% in the quarter and by $15 million or 15% through the first three quarters.

Throughout 2015, we have experienced movement in crude oil, smaller economic growth, particularly in Asia; in exchange rates. Managing through such changes are a normal part of our business.

We expect our margins to be in the mid- to upper teens over the longer term, as they have been in recent years, as the fundamentals of the industry have not changed. For the four quarters ended September, our average petroleum additives operating margin was 17.5%, which is in line with our expectations of the performance over the long term.

On to cash flow for the quarter -- items of note included funding our normal dividends of $17 million and using more cash to fund the normal variations in working capital. We bought back 435,400 shares of stock for the total of $171 million in the quarter. We have also announced an increase in our dividend to $1.60 a share, a 14% increase; and have approved a new share buyback authorization of $500 million, which is good through the end of 2018. We continued to operate with very low leverage, with debt-to-EBITDA remaining below 1.3 times.

In Q3, we continued to execute on our capital investments on identified projects, which equated to $34 million, bringing the year-to-date spend to $84 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 improvements to our manufacturing and research and development infrastructure around the world.

In August, we announced the second phase of construction in Singapore, which includes additional component production units that will more than double our investment in that facility. The phase two construction is scheduled to be completed in 2017.

We still anticipate capital expenditures to remain higher than normal range for the next several years, in the $150 million-plus range, in support of our global growth plan, which has revised up versus what we've discussed for the last few quarters, primarily due to our phase two Singapore announcement.

In summary -- our business is performing well and is in line with our long-term view. We continue to invest heavily in research and development and additional capacity to support our customers worldwide and to meet our long-term growth goals. We believe the fundamentals of how we run our business continue to pay dividends to all of our stakeholders.

Sharon, that completes our planned comments. We'd like to open up the line for any questions, please.

(Operator Instructions) Ivan Marcuse, KeyBanc Capital Markets.

I know you just said this, but I missed it -- for your CapEx goal, is it -- you said $150 million for the next several years. Is that -- can you define that a little bit more? Is that part of the doubling of the investment? And then, based on that, how big of an impact will that have on your overall volumes and, I guess, your profitability? And how should that ramp up in 2016, 2017, 2018?

Ivan, this is Teddy. We're trying to give you all an indication that we see spending being somewhat higher in the next two or three years than we've previously told you. It won't be an even $150 million per year. It depends on the timing. But you can think of it in terms of $150 million a year for three years and be directionally right.

It is -- a lot of -- a fair amount of that is the second phase of the Singapore project, as well as some other additions to capacity. We invest for the long term. We're not changing our prior indications of -- or our prior growth goals that we've expressed to you. We still see the industry growing at 1% to 2% a year. We hope to exceed that by a couple of percentage points. And that's our plan.

Again, it may not be year-in and year-out, but over a long period of time. That's our expectation.

Great. I mean, most of those investment (inaudible) and your creditors have been Asia, and there hasn't been much growth elsewhere. So do you see, I guess, the possibility of or expectation that you need to take out some capacity out of Europe and North America as Asia sort of replaces whatever you're doing? Or is that not really how to think about it?

That's not at all how we see it. With the announcements in capacity increases that we're aware of, we don't see the industry supply-demand balance shifting. Even at modest growth of 1% or 2%, the industry will need additional capacity over the future.

You're right in that most of the capacity increases that we and others have announced are in Asia, where the largest growth possibilities are. But it's also where the infrastructure, certainly in our case, is smallest, in terms of capacity. We manage capacity like the business -- on a worldwide basis. And as we're adding more, it makes sense to add in the region where we're underrepresented and where our lead times are longer than they should be right now.

Do you anticipate your CapEx spending to be funded straight out of your cash from operations? Or do you think you'll have to take out a little bit of debt in order to fund these? Sort of how are you looking at that?

Ivan, this is Brian. From operations.

Great.

And then, I guess, if you look at -- I know this year has been sort of volatile in terms of raw materials and oil bouncing up and down. And you said there's really been no change. The past several years, your gross margin has sort of been in this 29% to 30%, occasionally 31%, 28%. But it's been 30%, 32%, 30%, 32%. Do you sort of expect long term -- has there been anything materially that's changed in the industry where 32%, 33%, or whatever it is, is sort of plateauing and goes forward? Or do you expect sort of -- is there a price in raw materials match back up -- you go back to that sort of 30% plus or minus a couple percent?

We're not changing our view on what we told you about operating margins being in the mid- to upper teens. I think part of what you see is in the cycle of raw materials and pricing, when we're in a low point in that, you're going to see higher margins, or margins at the higher end of that. And when the opposite is true, and raw materials and prices rise, you'll see margins being toward the lower end of that range -- simply the way the math works on that percent of revenue.

Great.

Then, last question is -- is there anything that's been driving sort of your fuel additives business? You said you saw some global growth, which I found to be pretty interesting, but then your additives were down -- your lubricant additives were down a little bit. Do you see any destocking? Or is it just sort of the way the shipments fell this quarter versus every other quarter?

Is your question about fuel additives, or lube additives?

Probably both. So have you seen any destocking would be one question. And then, the second and the last question would be, what's sort of driving the fuel additives growth? Because it seems like that market really hasn't been growing much at all, either.

I don't think we've been seeing any destocking going on. And on the fuel additives side, people do drive more when the price of fuel drops. And it's a small change, maybe 5%, in terms of miles driven, when gas prices are low; and 5% contraction when they rise rapidly.

Great. Thanks for taking my questions.

Sure.

Dmitry Silversteyn, Longbow Research.

Just to follow up on what Ivan has been asking in the lube additives side of the business -- your volumes are flat on the last three quarters through year end or through the current three quarters, was actually down the last two quarters. You talk about the industry still being 1% to 2% growth [mode]. So I understand why the fuel additive is growing, although I'd be interested in knowing if you're growing faster than the industry.

But any reason why you're growing slower than industry so far this year in lube additives?

I would think that the industry overall has seen some general weakness this year on the lube side. That 1% to 2% growth is still what we believe the market supports long term. But I think we've seen some weakness this year. And certainly, we're not satisfied with flat shipment. But I think it's, to some degree, a function of industry demand being a bit tempered this year.

Would you say that it has more to do with the automotive side of the business, or more to do with the industrial stationary, sort of heavy equipment side of the business? Where do you think the industry's slower this year?

I would expect that it's in both. But the industrial side has probably seen more slowdown.

Okay.

And then, the second question I had is in with regards to the raw material costs. You mentioned them as a benefit in the quarter for the (inaudible) margin expansion on a year-over-year basis. What was sort of the benefits on raw materials? And is this sort of the first of several quarters you're going to see that, or the last of several quarters you're going to see it? Where are we in sort of the raw material [aid] as a portion of the margin expansion?

Yes, Dmitry, this is Brian again. As we talked about earlier, the raw materials slowly flow through the P&L, and there's a little bit of a lag. I think the other thing that we just communicated is that we did see prices reset. So I think what you'll also see, as you've seen some of that dampened -- we will see some of the raw materials flow through, but it's at a much lower rate than it had been in the first two quarters of the year.

Okay. But even with the price reset, which you had in the quarter, which I think you've identified as something like $25 million on a year-over-year basis, you still delivered a pretty strong margin expansion. So was your raw material benefit sort of twice that, three times that?

Dmitry, I can get back to you. I don't have that right in front of me. But it wasn't much different than it had been the last quarter; more specifically what it looked like in the first quarter, where we had a similar margin.

Right, okay. I'll follow up on that.

Secondly, your R&D growth that you've seen, 15% this year -- are you going to be sort of satisfied with the level of spending, this level of spending, in 2016? Or is this sort of similar to your program on fixed capital investments, expanding your capabilities on a more sustained basis, and we can see this above-revenue growth rate in R&D for a couple of more years?

You would expect us to increase R&D over the next several years, but not at the rate that we're seeing this year.

So more like mid-single-digit rates?

I'm not sure.

Okay. So would it be fair to say that the rate that you're going to get [to us] with this (inaudible) profits is pretty much the level of funding that you need, and maybe you'll make adjustments as needed going forward?

Yes, that's correct.

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

Thank you.

Paul Langlois, Lord, Abbett.

I see that you did the stock buy -- share repurchase in the quarter. I was curious what your goals are on leverage, if there's any sort of maximum leverage that you would go to; and also what your views on your ratings are and where you feel comfortable.

Paul, we operate and plan to operate between 1 and 1.5 times. And that's where we've been over the last few years, barring any acquisition that may drive us to something higher than that. But that's the range that we currently feel comfortable operating in.

Okay, so (multiple speakers) --

Go ahead.

This current range, then, is kind of what we should expect to see going forward, then?

Yes.

And in regards to ratings?

What's your question?

Right now, you're sort of in the mid-BBB area. That's kind of where you'd like to stay, I assume?

Yes. I mean, we'd like to stay where we're at, or would like to be continuing at that range, as we've been over the last few years.

Okay, fair enough. Thank you.

Todd Vencil, Sterne, Agee.

Just a couple of follow-up housekeeping questions.

Can you give me the breakdown between lubricant additive sales and fuel additive sales that you usually put in the Q, Brian?

Yes. For the quarter?

Yes.

For the year -- yes, for the quarter, lube add was negative 7, and fuel add was positive 7.

Okay. And on the absolute level of sales to get you to this $536 million?

Negative 7, as I said, on lube; positive 7 on fuel. Negative 25 on selling, including mix; and negative 24 on currency.

Yes, no, I got that part. I was just looking for the total sales amount to get to the $536 million total sales [in strong] areas.

Sorry, Todd, I'm not sure what --

I'm sorry. I'll follow up with your offline. Thanks, appreciate it.

Yes.

Mr. Paliotti, there are no further questions at this time. Would you like to make any closing remarks?

No. Thanks, everyone, for calling in. And we'll talk to you next quarter.

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

Thank you.