NewMarket Corp (NEU) 2015 Q4 法說會逐字稿

Greetings and welcome to the NewMarket Corporation fourth-quarter 2015 financial results. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Brian Paliotti. Thank you, Mr. Paliotti. You may begin.

Thank you, Michelle, and thanks to everyone for joining us this morning. With me today is Teddy Gottwald, our Chairman and CEO.

As a reminder, some of the statements made during this conference call will 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 10-K.

During this call, we may also discuss non-GAAP financial measures included in the 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 2015 10-K towards the middle of February. It will contain significantly more details on the operations and performance of our Company. Please take the time to review it.

I will refer you to the data that was included in last night's release. All comparisons I mention will be the fourth quarter of 2015 to the fourth quarter of 2014, unless I indicate otherwise.

Now onto the fourth-quarter results. Our net income was $53.9 million, which calculates to earnings of $4.50 per share. Net income for the fourth quarter of 2014 was $52.1 million or $4.17 per share. Excluding the special items detailed in the release from all periods, earnings for this year's fourth quarter were $52.3 million or $4.44 per share, an increase of $0.14 compared to last year.

Petroleum additives' operating profit for the quarter was $75.3 million versus a record in 2014 fourth quarter of $85.5 million. Sales for the quarter were $476.7 million, down compared to the sales for the same period of last year of $547.9 million, due to lower shipments, foreign currency exchange, and changes in selling price and mix. Shipments were down 4.3% versus the Q4 of 2014. This decline, which represents the lowest level of quarterly shipments in three years, was primarily due to decreases in lubricant and fuel additive shipments in North America. The rapid decline in oil prices in the fourth quarter likely has led to some customer destocking in anticipation of lower base oil prices.

A couple other items of note for the quarter were the effective tax rate and cash generation and use. The effective income tax rate for the fourth quarter of 2015 was 20.3%, down from 28.8% last year. The rate in the fourth quarter of 2015 was lower primarily due to decreases in tax rates from some of our foreign subsidiaries and an increase in the tax benefits from our research and development activities in the US and Europe. The research and development tax credit in the US was passed during the fourth quarter of 2015, retroactive to the beginning of the year, so the full amount of the year was recorded in the fourth quarter.

During the quarter, we utilized the cash generated by investing $42.3 million as we execute our long-range capital plan, repurchasing $17.3 million of our stock and funding $19.2 million of dividends. We purchased 44,778 shares in the fourth quarter at an average price of $385.04 per share.

That covers the fourth quarter-items I wanted to address. I have a few items I would like to comment on for the full year, but I don't plan to cover all the information in the press release. We included a robust discussion in the release about the significant factors that affected the quarter and the full-year comparisons, like foreign currency and the cost of raw materials. But we don't view these items as out of the ordinary. They are factors that all companies deal with and we manage them in the normal course of business.

That being said, we do not plan to cover any additional details concerning these normal factors affecting quarterly swings as we manage our business for the long term.

Petroleum additives' shipments decreased 1.2% for the year, with increases in fuel additive shipments primarily in North America, offset by declines in lubricant additives in all regions, except Latin America. Shipments were below our expectations for both the quarter and full-year periods, as demand for lubricant products trended lower in the face of continued general weakness in the global economy. In addition, solid operating performance for the year was overshadowed by the impact of foreign exchange.

We make substantial investments each year in research and development in order to provide our customers with innovative products and solutions to meet their increasingly demanding business needs. In 2015, our R&D investment reached a record $158 million. These investments will continue in 2016 as we continue to invest for the long-term growth.

Our business continues to generate strong cash flows. During 2015, we paid dividends of $70.8 million, funded capital expenditures of $126.5 million, and repurchased 501,261 shares of our stock at a cost of $197.9 million at an average price of $394.71 per share. At the end of 2015, we had $482.8 million remaining on our stock repurchase authorization from our Board, which expires on December 31, 2018.

We ended the year with very low leverage, with debt to EBITDA at approximately 1.25 times.

For 2016, we expect to see an increase in capital expenditures versus 2015. This includes the ongoing spend on the completion of our Phase 1 of our manufacturing facility in Singapore and the continuation of the Phase 2 investment at that place. Phase 1 of the Singapore facility is nearing mechanical completion, with commercial shipments expected this spring. The Phase 2 investment will be commercially ready in late 2017. These investments enable us to provide quick and effective service to our Asia-Pacific customers, as well as those in India and the Middle East.

We will also be investing in several improvements to our manufacturing and research and development infrastructure around the world. We expect the capital expenditures to remain in the higher-than-normal range for each of the next few years to support our business plans.

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, and 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 businesses and improve profit.

Our business continues to generate significant amounts of cash beyond what is necessary for the 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 invest in potential acquisitions as both a use for this cash and to generate shareholder value.

Our primary focus in the acquisition arena remains in the petroleum additives industry. It is our view that this industry will provide the greatest opportunity for a good return to 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. And we expect to continue to operate with modest leverage in the 1 to 1-1/2 times range.

Our stated goal is to provide a 10% return per year to our shareholders over any five-year period, which is defined as EPS growth plus dividends. We may not necessarily achieve a 10% return each year and 2015 was such a year. Unfavorable exchange rates and softer industry demand have worked against us at a time when we have a great need to invest in the developing products to meet new upcoming market demand and pursue specific growth opportunities.

As we look ahead, we expect our petroleum additive segment to deliver solid results in 2016. We believe the fundamentals of the industry remain unchanged, with the market growing at a 1% to 2% rate, and we expect to exceed that growth rate over the long term. We are making investments to position ourselves for the future. Our capital spending is creating the capacity we need to grow and support our customers worldwide. Our research and development investments are positioning us well to provide added value to our customers, and our stock repurchases and dividend policy have been effective ways to use cash flow and modest leverage to improve shareholder return. Michelle?

(Operator Instructions). Eugene Fedotoff, KeyBanc Capital Markets.

(multiple speakers) could you provide some color on what was FX in the quarter impact, both on revenue and operating profit, one, and also the price mix in that?

On a revenue basis in the fourth quarter, the currency impact was $17 million and the price mix impact was $29 million.

And what was the FX impact on the operating profit?

The operating -- the impact of those two on the operating profit, I don't have those at the -- right here on me, but the impact of the currency in the shipments for the revenue was as I say it is.

And also, can you give us a breakdown between lube additives and fuel additives? Volume growth in the -- actually, decline in the quarter?

As far as the breakdown between lube and fuels per shipment in the quarter, we don't share that information.

Okay. And are you seeing a pickup in customer activity in the first quarter? Do you think the destocking that you saw in the fourth quarter is mostly over?

This is Teddy. We don't have any way to really firmly determine the amount of destocking or how long it goes on. We just know that when oil prices drop 40% in a two-month period, like they did in the fourth quarter, it is very likely that some of our customers chose to run their tanks down in anticipation in particular of lower base oil prices.

But that impact normally is a short-term impact and doesn't last beyond a month or six-weeks period. So, our anticipation would be that it would not continue.

Okay, got it. Thank you. And I guess a question on sort of -- do you think you lost any market share in lubricant additives in 2015, and if that's the case, do you expect to regain that market share in 2016, or the market overall you think was down in 2015?

I don't think we lost any share in 2015. I think the market was flat to maybe slightly down in 2015. Too early to get any outside viewpoint on that, but if you -- if we peel back and look at our business and where the changes occurred, we don't believe we lost any market share this year. We did not gain any either, which is disappointing to us.

And then, just a last question on gross margin. Should raw materials stay at current levels, do you expect gross margin to stay around 32% level through 2016?

We would expect the gross margin to be near to what we had in 2015 for (multiple speakers)

All right, thank you. Thanks.

Todd Vencil, Sterne Agee CRT.

Brian, do you guys feel like that 15.8% petroleum additives operating margin in the fourth quarter, was there any kind of cost/price benefit in there? I know your prices tend to react to your -- the same thing to your costs do, but, I mean, are you -- did you catch a little temporary tailwind in there or was it basically neutral?

It was basically neutral, Todd. We did not see any bumps or declines.

Okay, all right. And just thinking about how product prices have moved kind of through the year, if prices stay where they are now, how deep into 2016 would we be looking at negative year-over-year comps?

I don't know if we can answer that at this point. I can tell you that if you look at the fourth-quarter petroleum additives margins over the last few years, and then what happens in the first quarter and the subsequent quarters over the course of those last few years, we normally see the fourth quarter is a dampening -- has a dampening effect on overall operating margins and we expect to see a similar profile going into 2016.

Okay, that's helpful. And then, understanding that -- well, I mean, I guess -- I'm not sure you said it out loud. You might have and I'm just not thinking about it, but is the long-term outlook for operating margins in petroleum additives still in the mid to high teens?

That's correct.

So given what's gone on, and what is going on and whatever you think is going to go on with prices and volumes and costs this year, is there any reason to think that 2016 will be any different than that long-term expectation?

No. Same expectation, mid to high teens for the business.

Okay. Final one for me, you mentioned you are going to keep spending on R&D, which is as anticipated. Is that recent run rate of about $40 million a quarter a good -- a reasonable assumption to use?

I think that is a reasonable assumption for -- to use going forward.

Okay. Thanks a lot, guys.

(Operator Instructions). Dmitry Silversteyn, Longbow Research.

Thanks for taking my questions; a lot of them have been handled by the first two people asking, but I want to follow up on a couple of things. The lube additives business looked like for pretty much the full year volumes there were down 1% to 2%, and some of the growth happened in fuel additives during those quarters. Was this decline sort of accelerated in the fourth quarter to give you the 4.2% down? Or was it entirely the fuel additives, the decline after growing in the quarter, and then you still had lube sort of declining the normal 1% to 2% we saw in the previous three quarters?

This is Brian. They both accelerated a little bit. We saw, as you stated accurately, we saw fuels kind of grow across the first three and lube has been down. They both accelerated versus those paces in the fourth quarter. So, lubes was down a little bit more and fuels was down more than the first three as it had grown.

Okay. Since your customers apparently sort of worked off their inventories in the fourth quarter, would it be fair to assume that you guys took down your inventories as well and are maybe short inventory heading into the first quarter, expecting lower base oil prices?

No. Actually, we did not run ours down. We are prepared for 2016. Again, this is a normal quarterly variation. We don't really manage it quarter to quarter like that. I mean, we are looking across what the needs are for 2016 and managing inventories that way.

I mean, I understand those normally do it, but as you pointed out, you get a 30% decline in oil in one quarter, so I thought maybe this was abnormal enough. Okay.

I am looking at the Singapore plant. You talked about the expansion of Phase 1 coming on stream this spring. What would that sort of entail in terms of additional capacity, either in the region or for yourself on a corporate level? And sort of how quickly do you expect to fill the capacity before opening up Phase 2 next year? I am assuming Phase 2 is more additional products, rather than expansion of production of existing products.

Yes, Phase 2 is a different slate of products than Phase 1. And both of them combined, along with de-bottlenecking and some additional projects, are designed to give us the growth capacity we need to meet our goals. And our goals are to exceed the market growth rate by a few percentage points, so we are talking about mid single-digit volume growth over a five-year period is what we are gunning for and the capacity additions allow that to happen.

Okay. So the -- I guess my question is, for the products that are being made in Phase 1 and will be made in Phase 2, this capacity addition sounds like it will increase -- the (inaudible) for those products will increase by about 50%. Would that be the right takeaway from what you just said? Or 25%, something like that?

No, I think what we are trying to articulate is that the capacity that we are bringing onstream is part of a componentry of a world-scale plant, and as far as what we are looking at as far as the long term, this is just reinforcing us to grow to that few points better -- higher than the market over the long term. That is what we are bringing the capacity on to do.

Right. I guess what I was getting at is if you are going to be growing at 4% to 5% and I'm sure you don't want to be expanding plants every year, if you have a five-year, let's say, timeline built into this expansion, it sounds like (technical difficulty) it was about a 25% addition to your production for those particular products. That is something I wanted to confirm.

I am -- you mentioned a couple of times, both in the press release and on the call today, that you were somewhat disappointed in the volumes and the performance in 2015. Can you talk about sort of more specifically what disappointed versus your expectations for 2016 and for the next five years?

I think the market softness was a bit disappointing. We were not as successful as I would have liked to have seen us in picking up additional business at the rate that we had set our goals for.

Mostly, though, I would say our business performance was very solid, very -- we were pleased with most of the business performance in the course of 2015. The biggest disappointment was the impact of FX and our inability or our delays in dealing with that.

Thanks. Do you think the stronger dollar and more competitive position for international competitors was one of the reasons you were not as successful in picking up business while you stayed disciplined on pricing?

I don't think it is FX related, but I am not going to get into pricing or our strategy.

Okay, thank you very much.

There are no further questions at this time. Mr. Paliotti, I would like to turn it back over to you for closing comments.

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