NewMarket Corp NEU
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/25/2013

Operator: Greetings and welcome to the NewMarket Corporation First Quarter 2013 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host David Fiorenza, Chief Financial Officer for NewMarket Corporation. Thank you. Mr. Fiorenza, you may begin.

David A. Fiorenza - VP and CFO: Thank you, Doug, and thank you for joining us to discuss our first quarter performance. With me today is our CEO, Teddy Gottwald. We have a few planned comments, after which we'll open the lines for your questions.

As a reminder, some of the comments we will make today are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We believe we base our statements on reasonable expectations and assumptions within the bounds of what we know about our business and operations. However, we offer no assurance that actual results will not differ materially from our expectations due to uncertainties and factors that are difficult to predict and beyond our control. A full discussion of these factors can be found in our 2012 10-K. We plan to file our 10-Q before the end of April. It will contain more details on the operations of our company. Please take the time to review it.

I will be referring to the numbers that were included in last night's release.

Net income for the first quarter was $67.8 million or $5.07 a share compared to income of $66.5 million or $4.96 a share for the first quarter last year.

Earnings for both of the quarters include income from an interest rate swap, while the first quarter of last year also includes a charge for the early extinguishment of debt. The impacts of these are detailed on the first page of the press release.

First quarter of this year also includes the benefit of booking five quarters worth of R&D tax credits. You may recall that Congress did not reinstate the R&D tax credit until January of 2013. The reinstatement was retroactive for all of 2012. But we were not allowed to book it in the 2012 results. The full 2012 credit included in our results was about $2.9 million.

When you look at the overall P&L statement for the two quarters, you will notice that they are virtually identical at the revenue and the gross profit levels.

Petroleum additive sales were $558 million compared to $558 million last year. From a regional perspective both Europe and Asia posted slight increases. While North America and Latin America were slightly lower. The changes within each of these regions are not significant. In general they were all essentially flat.

As we often report, the change in revenue was due to the positive impact of lubricant additive sales, offset by lower revenue due to shipments in fuel additives, lower customer price mix and adverse foreign exchange impact.

Turning to additives operating profit at $102 million, exceeded $100 million, for only the second quarter in our history, excluding the quarter when we booked the legal settlement. The only other quarter over $100 million was the first quarter of last year when PA made $107 million. Our operating margin – profit margin for Petroleum Additives was 18.3% for this quarter and for the rolling four quarters, ending this quarter, the operating profit margin was 16.7%. These are all within the range of our expectations of the segment's performance over time.

In the quarterly comparison, total shipments were about even, with higher shipments of lubricant additives offset by lower shipments of fuel additives. Nonetheless, selling increased volumes of higher value products resulted in a favorable impact on gross profit, which was mainly offset by conversion and other costs. As compared to the fourth quarter, or sequentially, our shipments were up 6.5%.

Our GS&A increased about $6 million for the quarter, which explains the lower operating profit compared to last year since gross profit was the same. These increases were planned and are in alignment with our long-term business plans. The increases were about the same for S&A and R&D. During the quarter, we repurchased 90,000 shares of our stock at an average price of $253.61 a share. We ended the quarter with 13.3 million shares outstanding. We have about $227 million remaining on our repurchase authorization which is good until the end of 2014. We had our new debt structure in place for the entire quarter. The interest expense posted for the quarter will be similar for future quarters, but the exception of whatever the interest associated with the revolver borrowing will be.

Cash at the end of the quarter was $64 million which is a decrease of $25 million from the beginning of the year. Cash flows provided from operating activities for three months for $27 million which included a decrease of cash of $55.7 million, due to higher working capital levels. From a high level, the main driver of the increase in working capital was accounts receivable. There were other plusses and minuses but accounts receivable was the main impact.

Our receivables picture is under control from the DSO or days sales outstanding standpoint, and the increase is mainly due to the fact that we had $46 million more revenue in the first quarter compared to the fourth quarter of last year. We spent $16.1 million on capital expenditures and still estimate our spending for the year to be in the $80 million range of capital expenditures. We also paid $12 million to fund dividend.

We continue to operate with very low debt leverage. Our debt to EBITDA ratio at the end of the quarter was about 1.1 and we have about $570 million available on our revolving line of credit, which affords us the flexibility we need to operate and grow our business. We are very pleased with our first quarter's outstanding results. We are confident that the implementation of our strategy benefits our customers' which in turn benefits our shareholders. We have expectations that our Petroleum Additives segment will deliver improved results in 2013 after having posted record operating profit in each of the last several years. While our total shipments for 2012 contracted somewhat due to many factors, including the global economy, we expect the Petroleum Additives shipment demand will continue to grow at the annual rate of 1% to 2% over the next several years as there has been no significant change in the positive fundamentals of the business. We continue to plan to exceed that average growth rate.

As a global company operating in many countries around the world, we are not immune to world economic condition. It appears that each time we think we see signs of improvement in the economy, the results contradict it. We have been disappointed that the global economic activity has not recovered as robustly as we would like. Our expectations for 2013 include the assumption of a modest economic recovery around the world. We do not see that recovery in any measurable fashion in the first quarter, but continue to plan our business around that eventual recovery.

Our business continues to generate significant amount of cash beyond what is necessary for the expansion and growth of our business. We have made no changes to the priority of the use of that cash, business growth and expansion first, acquisition and shareholder rewards. We will continue to evaluate all uses of the cash generated by our business to enhance shareholder value.

Thank for your time and Doug that's the end of my planned comments.

Transcript Call Date 04/25/2013

Operator: Ivan Marcuse, KeyBanc.

Ivan Marcuse - KeyBanc Capital Markets: Real quick and the one thing you said in your planned remarks Europe was flat year-over-year I know last year it was down a little bit, but for every other company it seems to – Europe seems to be drag. So what do you think explains your ability to sort of keep the market flat is just where you're at or is it just I don't know if you can talk a little bit about that?

David A. Fiorenza - VP and CFO: Ivan as we've discussed a lot of times our business is a little bit contrary economic in the sense that people tend to maintain their cars. So, we didn't see a big drop off and we haven't seen certainly any big recovery. Also when I see Europe we always speak about how we the management look at the business and Europe to us is Europe and the Middle East and some other parts of the world so maybe that's also part of that.

Ivan Marcuse - KeyBanc Capital Markets: Then sequentially did raw materials were – was the basket down a little bit fourth quarter versus – first quarter versus fourth quarter?

David A. Fiorenza - VP and CFO: Yeah, we were talking about that earlier. Raw materials have been as a basket a remarkably benign or flattish. Some are up some are down, sequentially just very modestly lower very, very modestly, year-on-year about the same. So, we're not seeing big movements in raw materials.

Ivan Marcuse - KeyBanc Capital Markets: And then there has been some base oil price announcements and I know crude is bouncing around and you had some shortages in some other material. So would you expect that basket to sort of increase going through the year?

David A. Fiorenza - VP and CFO: Our planning base from our purchasing team is relatively flattish for the year. They do recognize what you said that some are going up, but some others are going down, so that's our planning view, relatively flat as a basket.

Ivan Marcuse - KeyBanc Capital Markets: And then your volumes were flat for the quarter on a year-over-year basis. My understanding is that the market was maybe down 1% to 2%. Are you seeing the same – would you agree with that and do you think, even though your volumes are slight outperforming the overall market?

Thomas E. Gottwald - President and CEO: This is Teddy. I think when we look at last year just anecdotally, a number of our customers saw volume declines in the market in the 5% range. Into this year we've been expecting to see better recovery. Is a 1% or 2% decline number a good one? I guess it depends on compared to what time period, but we're just not seeing good recovery that we expected. We're still expecting a good year. We're not counting on the industry turning, but a couple of percentage point improvements would be very welcomed by our customers and by us.

Operator: Dmitry Silversteyn, Longbow Research.

Dmitry Silversteyn - Longbow Research: If you look at, I guess, everything else had a volume in the Petroleum Additives segment, and it looked like it was slightly, slightly positive. I know there's foreign exchange in there and price and mix and what not and you've talked about mix being positive. We've had some price concessions by your downstream customers amongst the lube blenders, are you experiencing any kind of pricing pressure in your markets either in lubes or in fuels?

Thomas E. Gottwald - President and CEO: Dmitry, we generally don't talk about our pricing, but I'm not aware of a lot of price concessions among our customers with their customers.

Dmitry Silversteyn - Longbow Research: Well, I think there was a fairly public announcement in December that in the mass merchant business at least there were some price concessions given. But so, okay, I guess what I'm driving at is as David mentioned on the earlier question, the base oil pricing is a little bit more benign these days and maybe not so much in Group I, but certainly in Group II and III which you buy less off and that's not as big of a contributor to your raw material basket as some of the additives. But even the additive guys are talking about some softness in pricing. So I was just wondering, if you're experiencing any kind of pressure for customers or if you're still selling value and are able to hold onto pricing?

Thomas E. Gottwald - President and CEO: Yes, we're still selling value and our general answer is that the industry fundamentals haven't shifted and we're still able to price according to the value that we provide.

Dmitry Silversteyn - Longbow Research: You talked about the lube volumes in your lube additives business being up and then the fuel additives being down this quarter. Can you talk about sort of what the drivers of that are and what's your expectations are for these businesses going through the rest of the year?

Thomas E. Gottwald - President and CEO: I also made the comment that none of those movements were significant. We do have an obligation to report that sort of data we've agreed with the SEC, but it wasn't significant enough for us to draw any conclusion from that what so ever.

Dmitry Silversteyn - Longbow Research: So, it sounds like it was just sort maybe quarterly variations but not so much of a trend in…?

Thomas E. Gottwald - President and CEO: That is correct. We did have that 6% plus improvement from 4Q.

Dmitry Silversteyn - Longbow Research: So, there's no issues with fuel additives that would make you in anyway concerned about the year?

Thomas E. Gottwald - President and CEO: That's correct.

Dmitry Silversteyn - Longbow Research: You've talked about sort of targeting the emerging markets and obviously part of the European sales goes into emerging markets. Can you update us on your progress in Asia and Latin America as far as the market opportunities and what you are doing about exporting those?

Thomas E. Gottwald - President and CEO: Sure. We've expanded quite a bit in our geographic presence in terms of sales force, in terms of technical presence and seeing on the ground and getting closer to the customer and understanding their needs is the critical part of it. We've spent a lot more money in developing products specifically for customers in those regions and that's been helpful. We're seeing significant growth in those regions over the last five years. They continue to be important to us as we look ahead.

Dmitry Silversteyn - Longbow Research: Final question on the tax rate for the year, given the R&D tax credit and how you are going to be accounting for them as well as other considerations? What should we expect for, for the balance of the year in terms of tax rate?

David A. Fiorenza - VP and CFO: 32%.

Dmitry Silversteyn - Longbow Research: So, that would be for the year as a whole which means that since you've delivered…

David A. Fiorenza - VP and CFO: Instead of Q2, Q3 and Q4, each we should pay around 32%.

Dmitry Silversteyn - Longbow Research: Then finally, you talk about M&A opportunities or wanted to get or accelerate your growth by some bolt-on acquisition. Obviously, you're willing to talk about anything that's growing, but in terms of your overall market environment, seller's willingness to sell, the fit with your business. Can you talk a little bit about where you are in pursuing some of these opportunities?

Thomas E. Gottwald - President and CEO: Happy to. We can't help but, mention the word patience every time we talk about M&A. Our focus is very much on our industry from and M&A standpoint and we continue to scour the world for opportunities, talk with our business team about what's on their wish list and which ones would be the best fit. They are in the whole lot of desire that we're aware of on the part of sellers right now, but we continue to stay abreast and try to open doors where we can.

Operator: Todd Vencil, Sterne Agee.

Todd Vencil - Sterne Agee: David, you had talked a few weeks ago about sort of the pattern that you saw last year, volumes and margins from the fourth quarter to first quarter, and on a somewhat smaller magnitude, it does seem to have repeated itself this year. Do you have any further thoughts or clarity on what may drive this sort of volume pullback in the fourth quarter and then that rebound in the first quarter?

David A. Fiorenza - VP and CFO: Todd, I really don't. As we have talked in these calls in the past, the current demand just seems to be more and more and more difficult to predict. I don't have a scientific answer to this pattern, if this is one. But it seems to have repeated itself.

Todd Vencil - Sterne Agee: Is it perhaps as simple as a destocking at your clients or would you be aware of that if that was happening, and at the end of the year for accounting reasons or whatever other reasons?

David A. Fiorenza - VP and CFO: I would just be guessing if I answer that question. I don't have visibility to why someone may or may not buy. I can't help.

Todd Vencil - Sterne Agee: Can you walk through and unpack the impact of volume and price and FX as you usually do on a year-over-year basis?

David A. Fiorenza - VP and CFO: Sure. So the impact of the shipments was a favorable $10 million. The impact of selling price, which includes mix was negative $8 million and foreign exchange was negative $1.5 million.

Todd Vencil - Sterne Agee: Then you guys had put out a release regarding the retainer of advisor to look at the possibility of selling the Foundry Park building. Can you give us a little color on what the indications of interest there were and where you may be in that process?

Thomas E. Gottwald - President and CEO: Todd, I can't really add more than what's in the release. We are gauging the interest out there right now. There seems to be quite a bit of interest, but we are still early in the process.

Operator: Kevin Hocevar, Northcoast Research.

Kevin Hocevar - Northcoast Research: Dave, you guys stepped back into the stock repurchase game this quarter. You've been on the sidelines for a couple quarters. So just kind of wondering what brought you back at this point?

David A. Fiorenza - VP and CFO: Every quarter we spend a fair amount of time talking about potential uses of cash. We weigh the possibility of acquisitions certainly with the availability of cash and the current market price. We've been out for quite a while, as you mentioned, and it just appeared that the price of our stock has been trading in a fairly tight range in recent months and we're comfortable with that and just compared to other choices, we figured it was good use of cash in this quarter.

Kevin Hocevar - Northcoast Research: And Dave you mentioned that the SG&A spending has been up in the first quarter for planned reason, just kind of wondering, or should we expect that the carry forward into the following quarters and should SG&A then be higher as a percent of sales this year, then it was last year?

David A. Fiorenza - VP and CFO: I don't know about the percent of sales, but we are not going to back off to the spin rate you saw in the first quarter. So, it's our expectation – my expectation that the spending in S&A and R&D will be higher more than inflationary because we are adding people, and we are adding test facilities, and we are adding capabilities and that will result obviously in higher cost in the P&L.

Operator: Edward Yang, Oppenheimer.

Unidentified Analyst - Oppenheimer: This is (indiscernible) fitting for Ed. I'm sure you have been asked this before, but given the current environments where volumes have been flattish, do you still think that capacity additions by you and other are needed? And, I mean, could there be any impact on kind of the supply demand balance?

Thomas E. Gottwald - President and CEO: Sure, we make decision on capacity additions looking at longer-term trend, and I would reckon that our competitors do as well. Our view on the industry growth hasn't changed. We still see it in the 1% to 2% a year range despite the weakness or lack of growth over the last year. Our view on the future hasn't changed and the industry will need small incremental additions to capacity going forward, no change there.

Operator: Ivan Marcuse, KeyBanc Capital Markets.

Ivan Marcuse - KeyBanc Capital Markets: You said in your base assumptions looking out into '13 that you are expecting some sort of modest recovery in your overall markets, and you didn't see that in the first quarter and who knows if it actually happens. But then that also implies that you said that you expect your earnings to look at it. If you don't see any recovery in volumes, just sort of staying just sort of benign, will you still be able to increase your earnings on a year-over-year basis or do you need a volume pick-up?

David A. Fiorenza - VP and CFO: No, our expectation is that we'll have a better year this year over the last, even and if volume doesn't pick up from where it is today.

Ivan Marcuse - KeyBanc Capital Markets: Then, a quick question, interest expense $5 million. Is it sort of a run rate do you use going forward on a quarterly basis?

David A. Fiorenza - VP and CFO: Yeah, that would be a good number to use.

Operator: There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

David A. Fiorenza - VP and CFO: Thanks everyone for joining us and we'll talk to you next quarter. Have a good day.

Operator: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.