NewMarket Corp (NEU) 2016 Q4 法說會逐字稿

Greetings, and welcome to the NewMarket Corporation fourth quarter 2016 and year-end financial results. 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. I would now like to turn the conference over to your host, Brian Paliotti, CFO. Thank you, Brian. You may begin.

Thank you Rob, and thanks 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 may be forward-looking statements. 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 the non-GAAP financial measure included is our earnings release. The earnings release which can be found on our website, includes a reconciliation of the non-GAAP financial measure to comparable GAAP financial measure. We intend to file our 2016 10-K towards the middle of February. It will contain significantly more detail on the operations and performance of our Company. Please take time to review it, and I will be referring to the data during this call that was included is last night's release. So on to the fourth quarter results.

Our net income was $45.7 million, or $3.86 per share. The net income for the fourth quarter of 2015 was $53.9 million, or $4.50 a share. Petroleum additives operating profit for the quarter was $75.6 million, about even with the fourth quarter of 2015. Sales for the quarter were $500 million, up 4.9% compared to the sales for the same period of last year, due to higher shipments and product mix, partially offset by changes in selling price. Shipments were up 10% versus fourth quarter 2015, but remember that shipments in this quarter last year were very low, due to some customer de-stocking in anticipation of lower base oil pricing.

A couple of other items of note for the quarter were the effective tax rate and uses of cash, the effective income tax rate for the fourth quarter of 2016 was 28.6% versus 20.3% last year. The rate in the fourth quarter of 2015 was unusually low, mainly because we recorded a full year of US research and development tax credits in that quarter. During this past quarter in addition to funding $19 million of dividends we spent $41 million on capital expenditures in support of our long range capital plan. We ended the year with a very low leverage with net debt to EBITDA below 1 times.

Turning to the full year our net income in 2016 was $243 million, up 2% versus 2015, our earnings-per-share exceeded $20 for the first time in our history, reaching $20.54, up 5.6% from 2015. Petroleum additives operating profit was $385 million, up 2.7% versus the prior year. Petroleum additive shipments increased 1.1% for the year, fuel additive shipments increased primarily in North America and Asia-Pacific, and were partially offset by a decrease in Europe. Lubricant additive shipments also increased between the years, mainly due to increases in Asia-Pacific and Europe, which were largely offset by lower shipments in North America and Latin America.

In 2016 our global R&D investment again exceeded $150 million. Our customers needs for innovative products and solutions continue to grow, and of course we are committed to deliver new and improved products to help them meet their needs. Our R&D investments will continue in 2017, as we invest to meet the demands of the future, and achieve long-term growth. Our business continues to generate strong cash flows. During 2016 we paid dividends of $76 million, and repurchased about 99,000 shares of our stock, at a cost of $36 million, at an average cost of $365.25 per share.

Our capital expenditures in 2016 were $143 million, in support of our long range plans to expand our technical and manufacturing capabilities around the globe. For 2017 we expect to see similar capital expenditures versus 2016. This includes the ongoing spend to complete Phase 2 of our manufacturing facility in Singapore, which will be finished in late 2017. These investments enable us to provide quick and effective service and support to our Asia-Pacific customers, as well as those in India and the Middle East.

In line with our long-term strategy in December of 2016 we announced our intent to acquire Aditivos Mexicanos S.A., or AMSA. AMSA is a petroleum additives manufacturing sales and distribution company based in Mexico City, with a manufacturing facility in San Juan Del Rio, Mexico. It has been in the petroleum additives business for 50 years, and has a strong experienced team. AMSA is our largest acquisition since buying Texaco Additives Company in 1996, and it represents our continued laser focus on the petroleum additives industry, and our commitment to serving our customers worldwide.

The acquisition will help strengthen our position in Latin America, broaden our global supply capability, and improve our passion for solutions business model, that continues to deliver long-term value to our customers. We expect to close the transaction in the first half of 2017, pending a regulatory review in Mexico, and we expect it to modestly be accretive to earnings this year. We will have more to say about AMSA as the year unfolds. In January we also completed a private placement of $250 million in new debt, at a fixed-rate of 3.78%. This brings our total fixed debt to $600 million, which is about 1.5 times our 2016 EBITDA. Our revolver also gives us ample debt capacity for operations, investments, and additional acquisitions.

As we have stated before, we are comfortable with maintaining net debt-to-EBITDA in the 1.5 times range, and it makes sense in this environment to lock in interest rates for this amount. Our business continues to generate significant amounts of cash, and our priorities for cash remain the same. Investment in the business for the long-term growth, find acquisitions that can strengthen our competitive position in petroleum additives, and reward our shareholders through dividends and stock buybacks.

Our stated goal is to provide a 10% per year return for our shareholders over any five year period, defined by EPS growth plus the dividend yield. And the implication of this goal is that we may not necessarily achieve the 10% return each year. The petroleum additives industry continues to be challenging and highly competitive, and given the demands of 2016 and the significant amount of long-term investments made during the year, we are pleased with the more than 7% return we provided to our shareholders in the year.

As we look ahead we expect our petroleum additives segment to deliver solid results in 2017. We believe the fundamentals of the industry remain unchanged with the market growing at 1% to 2%, and we expect to exceed that growth rate over the long-term. In a changing global economic environment, we view 2017 as we view every other year, one of continued challenge and change, which we will monitor and operate through in the normal course of business.

We continue to make investments to position ourselves for the future. Our capital spending and recently announced acquisition are 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 and repurchases and dividend policy have been effective ways to use cash flow and modest leverage to improve shareholder return. Rob, that concludes our planned comments. We would now like to take any questions.

Thank you. (Operator Instructions). Our first question he is from the line of Dmitry Silversteyn with Longbow. Please proceed with your question.

Morning guys. This is Matt Skowronski in for Dmitry. First question can you break down the volumes for lubricant additives or fuel additives in the quarter?

Matt, we don't have a break down. We have one segment which is petroleum additives, so there isn't a breakdown between lubes and fuels from a volumetric shipment perspective.

Okay. All right. Perfect. And then can you quantify how much of raw material inflation you saw during the quarter, and how much that hurt gross margin?

I can tell you across the balance of 2016 we didn't experience only a slight increase in raw materials across the year.

Okay. Perfect. And then as far as the acquisition goes, could you just talk a little bit about your motivation for that, I mean how quickly do you think that's going to start to add to either mix or volumes?

Yes. Good morning Matt. This is Teddy. We are excited about this acquisition. It is a solid business. As we mentioned they have been in the business for 50 years. It is a very good overlap and fit with our business. We see it as an acquisition that is going to be very helpful and strengthen our global supply capability, giving us more strength in the Latin American market, and giving us the ability to provide even better solutions for our customers. It is not an acquisition that requires cost cutting to see benefits. So we do expect that from the time we close it, we will start seeing a positive impact.

Okay. That sounds good. Immediate impact. Okay. And then my next question is regarding Singapore. It sounds more like it's going to be a 4Q story. Could you just tell us a little bit, how quickly do you think that's going to ramp-up and we're going to see results from that?

Yes. The physical completion will be in the second half of this year, and it will take us a bit to get it fully operational and qualified. It will ramp-up just as quickly as we can bring in the volume to grow.

Okay. All right. Thank you so much. That is all the questions I have.

Thank you.

(Operator Instructions). Our next question is from the line of Paul [Mula, Gasau]. Please proceed with your questions.

Yes. On the Aditivos Mexicanos acquisition, is this a situation that you would be able to apply some capital in a helpful way, for that business to grow in a way there that it has not been able to?

Possibly. It has a lot of capabilities, and we'll be looking at what additional capabilities it has that we can get the most out of.

Okay. Thank you.

Thank you. There are no additional questions at this time, Brian.

Okay. Well, thanks everyone for calling in, and we'll talk to you again next quarter.

This concludes today's teleconference. Thank you for your participation, and you may now disconnect your lines at this time.