NewMarket Corp (NEU) 2016 Q3 法說會逐字稿

Greetings and welcome to the NewMarket Corporation third-quarter 2016 financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your post, Mr. Brian Paliotti, Chief Financial Officer for NewMarket. Thank you. You may begin.

Thank you, Michelle, 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 filed our 10-Q earlier today. It contains 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 $71.4 million or $6.03 a share compared to net income of $62 million or $5.08 a share for the third quarter of last year. Earnings for both third-quarter periods included the impact of valuing an interest rate swap at fair value. Excluding that special item from both periods, earnings for this year's third quarter would have been $71.1 million or $6 a share.

Petroleum additives operating profit for the quarter was $106.4 million, which is about $6 million or 6% higher than last year. Petroleum additives sales for the quarter decreased 4.4% to $512 million compared to sales for the same period last year of $536 million. Of the $24 million reduction in revenue, price and mix accounted for the majority of the change.

Petroleum additives shipments for the third quarter of 2016 were flat with the same period last year. We experienced decreases in lubricant additive shipments in North America, Europe, and Latin America, with fuel additive shipment increases in North America and Asia-Pacific.

On the cash flow for the quarter, items of note include funding our normal dividend of $19 million and normal variations in working capital. We continue to operate with very low leverage. For 2016, we expect to see an increase in the level of our capital expenditures to a higher level than 2015, which includes the spending on our phase 2 Singapore investment, as well as a number of improvements to our manufacturing and research and development infrastructure around the world. For the three quarters of 2016, we ramped up spending to $102 million. Our investments in Singapore are progressing well and are on schedule.

We expect capital expenditures to remain in the higher-than-normal range for each of the next couple years, in support of our growth plans. This is no change from the position we discussed over the last several quarters.

In summary, our business continues to perform well, and we are pleased with its overall performance as we continue to operate the business in a climate marked by the lower world economic growth and a strong US dollar. We remain focused on the long term, and we are investing to support our customers worldwide to meet our long-term goals. We remain committed to our safety-first culture, and to providing customer-focused, technologically-driven solutions into a world-class supply chain to meet our customers' growing needs. And this approach will continue to be beneficial to our shareholders.

Michelle, that concludes our planned comments. We'd like to open up the lines for any questions, please.

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

Real quick, it looks like raw materials probably didn't do much from second quarter to third quarter. Oil has bounced up a little bit. Have you seen any sort of signs that material costs are going to be rising anytime soon, or is it still a pretty benign market, from what you can tell?

Ivan, this is Brian. From a raw material perspective, we see raw material costs holding; slightly on the rise, but those change daily. But nothing material.

Okay. And then a quick question. I understand that you lay out some regions are doing better than others. If you look at your lubricants business, do you have -- is there any material difference between the subsectors? Is there any signs that industrial or driveline is doing a lot better, and you are seeing an improvement in your mix because of that? Or is there any sort of movements from that perspective?

Ivan, we're not seeing any material change from a subsegment perspective across the product line portfolio in any region.

Great. So they are all down the same, or up the same, region to region?

Yes, as far as the regional overview statement we're making from a lubes and fuels perspective, we're not seeing any material change in any one of the segments in any region.

Okay. And then the last question is, have you seen -- is there any competitive changes within the landscape? I know we're sort of in a no-growth type of environment for several quarters now. Have you seen any sort of -- and there's been some investments -- anything where people are -- companies maybe getting more aggressive, or certain regions are getting more aggressive in terms of pricing, or trying to get some business at all?

Ivan, it's Teddy. There's nothing really new to report there. The dynamics are as they've been for some time.

Okay, great. So a last question, tax rate: are you still sort of in this 29%, 30% range going forward?

I would say that's a good range to be in, Ivan, from a go-forward.

Great. Thanks.

(Operator Instructions). Dmitry Silversteyn, Longbow Research.

Thanks for taking my questions. A couple of them. First of all, I want to revisit or maybe ask Ivan's question a little differently. It looked like raw materials benefited you, roughly speaking, about $30 million in the quarter, offset by about $19 million, $20 million in lower pricing. We're seeing raw materials tick up, as you mentioned, a little bit here in the September quarter; flattening out -- flat year-over-year. Should we expect this to be -- the fourth quarter to really be the last quarter where you enjoy material raw material benefit, pardon the pun, assuming prices obviously stay at these levels?

Dmitry, this is Brian. I would say that, from a margin profile perspective, in reference to what you're talking about from a raw material -- we see raw materials holding. We don't have any better insight into the forward view on what raw materials are going to do. We have seen a slight uptick. But from the perspective of what we think margins will be, we think we're going to be in that mid- to high-teens. Sometimes we'll be outside of that range for a little period of time, on either end. And that's where we see things today and over the future.

Okay, Brian. That's helpful. Okay. Switching gears to volumes a little bit. This is -- your volume performance, you call it flattish. According to my calculations, it's down about 1%. But, regardless, it's significantly better than it's been the last several quarters. Can you discuss volume trends through the third quarter, whether or not you've seen some kind of a pickup towards the end of the quarter, or whether it was pretty steady through the quarter? And then did you see any impact from the extended shutdowns in European automotive OEM that seemed to have happened around August time frame, and the overall slowdown in the European economy?

Dmitry, this is Teddy. We really haven't seen anything outside of the normal patterns. And as you know, our business varies -- the volume varies quite a bit from quarter to quarter. The factory fill business that you referenced is a fairly small portion of our business, so it's hard for us to see the impact of any auto company changes in the span of a quarter or two.

Okay. Well, Teddy, maybe a slightly different way to ask the same question. Was the market conditions, or how the order patterns fell in the beginning of the quarter, pretty similar by the end of the quarter? Or was there any pattern that you can identify that would help us gauge what the December quarter may look like?

Dmitry, this is Brian. There was no -- it's hard enough, honestly, to look at the volume trends from a quarter-to-quarter versus month-to-month. But inside of the quarter, there was nothing discernible that you could say was a major change from month to month.

Fair enough, okay. A quick update on the Singapore facility progress. I think phase 1 went live during this quarter, if I remember correctly. Was there any impact on gross margin as a result of that? And how do you see the phase 2 coming online? And what's your time table for that plant ramp-up? Can you update us on that?

I can speak to the schedule. We are on schedule with physical completion in the second half next year, and production ramping up after that.

Brian, you want to comment on the cost implications?

Yes. Dmitry, from a cost perspective, we are -- phase 1 is already operational. So that's already -- that's in there, as far as the quarter is concerned. And then from a go-forward perspective, Teddy told you when the next phase will come online. So, from a cost perspective, it's in the figures for the quarter.

Okay, all right. So we're already seeing that -- the impact of increased depreciation and operating expenses for that plant that you used to capitalize in the third quarter already. Okay.

That's correct.

And final question, just the standard M&A pipeline: are things getting easier to buy, harder to buy? Are people becoming more reasonable on their multiple expectations that they expect to receive for their business? Any updates as far as the size of your hopper is concerned, and what your view is on getting something out the other end?

Dmitry, there's really nothing new to report. Our focus continues to be on the petroleum additives industry for acquisitions. The pool of possibilities hasn't grown or shrunk since we last commented on it. And it's just a small pool, and that's why we stress patience there. We're still actively interested in acquisitions in petroleum additives; it's just not very big pool.

I got you. If you can provide maybe a little bit more granularity on what the market looks like in terms of -- are you looking more at privately owned, family-owned businesses or portions of bigger companies, bigger divisions? Is there a regional focus?

I think it's probably some of all of the above. But it's mostly portions of larger companies that compete in niche segments of our business, whether it's fuels or certain industrial segments. That tends to be where most of them are.

Okay. Okay, Teddy. Thank you. That's all the questions I had.

(Operator Instructions). There are no further questions at this time.

I would like to turn the floor back over to Mr. Brian Paliotti for closing remarks.

I would like to thank everyone for calling in, and we will talk to you next quarter. Thank you.