NewMarket Corporation (NEU) Q3 2013 Earnings Report, Transcript and Summary

. Greetings, and welcome to the NewMarket Corporation Third Quarter 2013 Financial Results. [Operator Instructions] As a reminder, this conf is being recorded. It is now my pleasure to introduce your host, Mr. David Fiorenza, CFO for NewMarket Corporation. Thank you. Mr. Fiorenza, you may begin.

Thank you, LaTonya, and thanks to everyone for joining Teddy and me to discuss our third quarter results. 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 in the next few days. It will contain more details on the operations and performance of the company. Please take time to review it. I will be referring to the data that was included in last night's press release. All comparisons I mention will be the third quarter of '13 to the third quarter of '12 unless I indicate otherwise. Net income for the quarter was $79 million, or $5.94 a share compared to $65 million last year or $4.83 a share. For the 9 months, net income was $211 million or $15.81 a share compared to $187 million or $13.91 a share. Net income includes the results of the discontinued operation of the Real Estate Development segment and certain special items detailed in the summary of earnings on the first page of the release. Discontinued operations also include the gain on the sale of the office building, which was owned by Foundry Park I. Additionally all periods include the impact of valuing an interest rate swap at fair value, while the first 9 months of '12 include a loss on the early extinguishment of debt. So for the quarter, excluding those special items, earnings were $57.4 million or $4.32 a share compared to $64.9 million or $4.84 a share. On the same basis, 9 months earnings were $185 million or $13.90 a share compared to $194 million or $14.47 a share. With the number of shares we have outstanding, the pretax change associated with this $0.52 movement between the quarters was $10.5 million. As we will discuss in this call, petroleum additives was only a small portion of this reduction being down less than $1 million in the quarterly pretax comparison. I will point out the others as we going through the details. Petroleum additives segment posted another good performance this quarter. Net sales were up $578 million, an increase of $30 million or about 5.5% from last year's quarter. From a regional perspective, both Europe, Middle East, Asia -- and Asia had increased revenue, while Latin America was down slightly and North America was essentially unchanged. Overall product shipments increased about 6% between the 2 third quarter periods. When comparing the 2 third quarter periods, the dollar strengthened against the pound and yen and weakened against the euro. Petroleum additives segment operating profit remained strong and relatively consistent between the 2 third quarter periods. For year-to-date, petroleum additives' operating profit was $295 million, which is about $5 million lower than last year's year-to-date. The small decrease between the third quarter periods reflect a reduction in fuel additive profit and unfavorable currency impact, all of which were substantially offset by improved results in lubricant additives. For the 4 quarters ending this quarter, the operating profit margin was 16.5%, which is in line with our expectations of the performance of our business over the long term. Gross profit results were favorable by $6.7 million in the third quarter comparison and $16.5 million in the 9-month comparison. Raw material costs were essentially unchanged in the quarterly comparisons. There were increases in each of SG&A and R&D, which essentially eliminated the gain at the gross profit level. We continue to believe the fundamentals of our business and industry are unchanged, and we continue with this purposeful spending on programs to support our current business base and to ensure that we develop products to support our customers' program in the future. In the All Other segment, you will notice a loss this year compared to a gain last year. This line item contains the results of our TEL business. The big swing in the quarterly comparison of $3.4 million was essentially driven by certain accruals related to the historical operations of that business. Interest expenses were $4.3 million for the quarter, which is an increase of $3 million from last year's third quarter. The increase was driven primarily by the extra costs associated with our selling $350 million of bonds in December of last year. For your reference, there will be 1 more quarter where we will compare last year's revolver expense to that of the bonds. Other income, net, for the quarter was an expense of $600,000 compared to $100,000 last year. The amount for 9 months was $5.5 million this year; and for 9 months last year, it was $3.7 million. The amounts for the 9 months primarily represent the gain in 2013 on the swap and the loss in 2012. The amounts in the third quarter primarily reflect this. Additionally both 2012 periods include a gain of $1.7 million related to the sale of common stock that was received in 2011 as part of a legal settlement. On the tax data, the effective rate was 30.6% versus 30.4% for the quarterly comparison. For the 9 months, the effective rate was 29.8% compared to 31.7% last year. While there are many contributing factors, the inclusion of 7 quarters of R&D tax credits in 2013 and none in 2012 is the main driver of the reduction. As you may recall, 9 months 2013 period reflects the effects of the 2012 R&D credit, as that was passed in legislation at the end of the year. On July 2, Foundry Park completed the sale of its real estate assets for $143 million in cash. The operations of the Real Estate Development segment are now reported in income from operations of discontinued business. We recognized a gain of $21.9 million after tax this quarter related to this transaction. We will pay the income tax liability of $17.5 million associated with this transaction in the fourth quarter. Turning to our cash position, we had $247 million at the end of the year -- at the end of the quarter, which was an increase of $158 million since the year started, and this is on top of reducing our debt by $72 million. If you look at the selected items of cash flows that were included in the package, you can see the major components of our cash activities for the year. Cash flows from operating activities for 9 months were $208 million as this business continues to generate significant amounts of cash. Cash associated with investing activities included $47 million for capital expenditure, the Foundry Park proceeds, and changes associated with the interest rate swap. We estimate that our total capital spend in 2013 will be in the $65 million range. Cash used in financing activities for the year amounted to $150 million. This includes $75 million of revolver debt reductions, and this differs from the number I just mentioned due to an increase of $3.1 million borrowed outside of the revolver. We also had purchased $41.2 million of our common stock. For the quarter, we purchased 52,400 shares for a little over $14 million, at an average price of about $274 a share. And finally, we paid dividends of $36 million. We still have about $209 million remaining on our stock authorization for repurchases. We had no drawn debt on the revolver at the end of September and had an availability of about $647 million on that facility. You will note that the NewMarket board approved a $1.10 dividend payable on January 1, which is a 22% increase in the quarterly amount. This not only reflects on stronger business performance but on a desire by the board to reward shareholders by increasing the dividend payout ratio. We're pleased with our operations and results for the first 3 quarters. They reinforced our confidence that our customer-focused approach to the market is the path on which to continue. We believe the fundamentals of how we run our business: A long-term view, safety-first culture, customer-focused solutions, technology-driven product offerings, world-class supply chain and a regional organizational structure to better understand our customer's need will continue to pay dividend to all of our stakeholders. We continue to 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. We expect that petroleum additives segment demand globally will continue to grow in an average rate of 1% to 2% over the next 5 years. There have been no significant changes in the fundamentals of this business. Over the long term, we plan to exceed the industry growth rate. Over the past several years, we have made significant investments to expand our capabilities around the world. These investments have been in people, technology, in 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 business and improve profits. We will continue to expand our capabilities to provide even better service, technology and solutions for our customers worldwide. Most notably, we're excited about the development of our new Singapore plant and are on track to complete Phase I of its construction at the end of 2015. 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 which we have to utilize this cash, both from a geographic and product-line perspective. We continue our efforts in investigating potential acquisitions as both a use for this cash and to generate shareholder value. Our primary focus remains in the petroleum additives area. It is our view that this industry will provide the greatest opportunity for a good return on our investment while minimizing risk. We remain focused on this strategy and evaluate any future opportunities. Nonetheless we are patient in this pursuit and intend to make the right acquisition when the opportunity arises. We will continue to evaluate all alternative use of that cash to enhance shareholder value, including stock repurchases and dividends. That's the end of my prepared remarks. LaTonya, can we open the line up for questions, please?

[Operator Instructions] Our first question comes from Todd Vencil with Sterne Agee. L. Todd Vencil - Sterne Agee & Leach Inc., Research Division: Let's go a little bit back, which, now, I was thinking about it, since you were just talking about uses of cash. I mean, we're getting very close to the level of leverage that you guys were at last year around this time when you declared the special dividend. I mean, is that something that's still in your quiver? Have you changed the way you think about special dividends given the increase in the quarterly?

Todd, this is Teddy. I wouldn't rule anything out. But, as David said, our priorities are to invest in the business, look for acquisitions, and then turn to shareholder rewards, stock buybacks and dividends. The current debt level that we have is below where we'd like it to be, and we are sitting with a lot of cash. We're not going to just go spend it because it's sitting there, but it's our desire not to just accumulate cash on the balance sheet either. Nothing really new to report on acquisitions. They're few and far between in our industry, and that's where we're focused. And we continue to stress patience there. I do think that we'll be looking at using up the rest of the authorization on the stock buyback before it expires at the end of next year. We did raise the dividend and the payout there, and it's our intention, over time, to continue to raise that payout ratio, not dramatically from where it is, but it's been in the 15% to 20% of prior year's earnings, and we'd like to see it above that going forward. So I wouldn't rule anything out. We certainly don't have any plans for a special dividend at this time, but those are -- that's kind of how we're looking at uses of capital. L. Todd Vencil - Sterne Agee & Leach Inc., Research Division: You guys mentioned, both in the press release and in David's remarks, about the accruals in the tetraethyl lead business. Can you talk about what was in there?

Sure. That business has been around a long time, and we have some legacy obligations. And we true those up time-to-time. A couple of years ago, the true-up was income. This year, the true-up was expense. When our environmentalist's view of this long-term obligation changes, we have to put a dollar number on that. So these are very, very long-term obligations that have always been there, and these are just adjustments as we go along. L. Todd Vencil - Sterne Agee & Leach Inc., Research Division: So this is the environmental obligation related to the TEL?

Correct. That's correct. L. Todd Vencil - Sterne Agee & Leach Inc., Research Division: Got it. Got it. Okay. And switching over to petroleum additives, if I can. You saw a nice little pickup in the year-over-year shipment pace or, I guess, shipment comparison. Can you talk any about if that sort of continued into the fourth quarter?

I can't talk about the third quarter, I mean, the fourth quarter is still in front of us. Year-to-date is the way you have to look at it, Todd. Single quarter to a single quarter is often not very, very instructive. Year-to-date, I think, our number was up 2.3% or 2.4%. So I think you should read into that, that the business is doing fine, and we're moving on with our plans. L. Todd Vencil - Sterne Agee & Leach Inc., Research Division: Fair enough. As we look at the fourth quarter -- related to the question, I guess, are the pace of shipments, at least in part. The last couple of years, you've seen sort of a sequential decline in the petroleum additives operating margin from third quarter to fourth quarter -- from what it had been in the year-to-date, to fourth quarter that may have been related to the pace of shipments or maybe something else. I mean, do you anticipate seeing that same kind of step down in the margin in the fourth quarter this year?

Todd, it generally is shipment related. And the fourth quarter, traditionally, is a lighter quarter. It certainly has been in the last few years. We're anticipating a lighter fourth quarter than the last couple. But we told you, we expect to be up for the year, and that would certainly imply a better fourth quarter this year than last year. L. Todd Vencil - Sterne Agee & Leach Inc., Research Division: Got it. And then, I guess, final question is housekeeping, David. Can we get the components of the year-over-year change in the petroleum additive sales?

Yes. So shipments added $33.7 million, foreign currency added $0.9 million, and selling prices subtracted $4.7 million. And this is in the Q, by the way.

Our next question comes from Dmitry Silversteyn with Longbow Research.

A couple of questions, if I may. First of all, some bookkeeping stuff. Last quarter, you talked about CapEx for 2013 being in the $80 million range; now you're talking about $65 million. Is that just the pace of the expenditure in Singapore that's swinging it around, or is there other -- some projects that got maybe pushed out into 2014 from 2013?

Yes, Dmitry, good question. There's nothing in there, except we make estimates. And sometimes, we are a little bit bullish on how much we can get done in a time slot. So there's nothing in there. We're moving along with our plan.

Okay, sounds good. And what's your tax expectations for the year as far as after reporting the taxes through the first 9 months? Are you still looking at about 30% tax rate?

Yes, it's been ticking a little bit higher, 31%, but in that range, yes.

31% for the year or -- okay. So maybe it'll [indiscernible] on that for the quarter. Okay.

Right.

Good. You sort of answered the 6% volume spike that you saw in the quarter by saying that it's just -- you have to sort of look at the 4 quarter averages to get the idea. So it does not imply that there's any slowdown above seasonal levels coming in the fourth quarter. There was no pull forward in the sales it didn't sound like.

No, we -- that's correct. We can’t see any of that happening in the third quarter.

Okay. And then, if I understand your comment correctly about being up for the year in terms of profit dollars in the petroleum additives segment. Obviously, it implies a significantly stronger margin year-over-year, and so, I guess, my question is -- and it ties into the question from the last caller, is that -- should we not expect the similar seasonal declines in the third to fourth quarter that we've seen in 2012, 2013? And is there anything behind it other than just vagaries of the market?

The fourth quarter, as Teddy said, is almost always our lowest quarter. It's very likely this year's fourth quarter will be our lowest quarter. What we're saying is, we think it's going to be strong enough to make the year-on-year comparison positive. And it will likely be a lower margin than this quarter, arithmetically. But there's nothing going on in the business. It's just the year-end slowdown.

Our next question comes from Ivan Marcuse with KeyBanc Capital Markets.

If you -- raw materials, I guess, oil picked up a little bit during the quarter and base oil is coming up a little bit. But how did your basket react from second quarter to third quarter? And then what's -- now that we're a month in, what's sort of your projection for your basket on, at least, looking out the next quarter?

Yes, Ivan, good question. We were just chatting, before we got on this call that we can't recall a more calm or benign raw material bucket movement as we've seen this year. So 2Q to 3Q, relatively flat. Expectations, 3Q to 4Q, relatively flat.

Got you. Did you say that raw material -- this type of raw material environment, is this a positive or a negative for your business? Or would you rather sort of see a little bit of inflation?

We -- I think I like it to see it kind of quiet. If it's inflationary environment, it's never fun to have to go out and try to raise prices. So I think we like this environment that we're in now, and we'll deal with prices when we have something better to bring our customers.

Great. And then, there has been a lot of announcements -- and I know there's more -- a lot of ingredients and a lot of things that you buy to blend. There is a lot of nonsense. I see your competitors and other -- and suppliers about growing capacity in Asia, and wine, too, and that's really where the growth market is. So how do you look at your business? Why are you going to beat them at outgrowing their environment? And do you think any of this capacity expansion is going to be detrimental or helpful to the overall market out, looking out the next 2 to 3 years?

Ivan, there's couple of parts to your question. First of all, on the capacity side, even at a low growth rate of 1% or 2% a year, the industry still needs a significant amount of new capacity to meet the demand. And we're comfortable that the announced expansions, and ours as well, are sufficient to keep up with the industry growth, and we don't see it being enough to change the supply-demand balance, us and our competitors combined. As far as how we're going to exceed the industry average growth, we've commented on this in the past. It's certainly our view that with our customer-focused approach of getting close to them and understanding their needs and providing solutions tailored to their needs, that we can continue to grow at a good clip. We're also looking at geographic expansion. Our market share, in certain regions, is lower than it is in the more -- our more traditional markets of Western Europe and North America. So room to grow share in the emerging markets, and room to continue to expand our product lines and to adjacent spaces that use similar technology. And those are the primary drivers of our plans going forward.

Got you. And then, 2 more quick questions. One on the R&D tax credit that's been a help this year. Is that something that should continue on at least into next year? Or do you think this is going to -- this benefit that you've had is going to fall off and raise your tax rate, or something, next -- in 2014 and just go at it and going on?

Right now, as we speak, Congress has not renewed it for 2014. So we'll -- I can't guess. I expect they will. I mean, they've eventually renewed it every year. But as you saw 1 year ago, they waited a whole year to renew it, and then they did it retroactively. So all I can answer is, right now, they haven't done that, but we expect they will, or at least they will try.

Very good. And my last question, on your -- and I'll jump off here. On the fuel additives business. It's been down. I haven't seen your queue yet, but I think you said that it was down this quarter. I think it's a couple of quarters in a row now where it's been down. And I've always understood, being a pretty consistent business. Is this a function -- more of a function that there's less miles driven or is there something else going on in that business where it's been down this year versus last year for one reason or another?

I can't put my finger on any one thing. In that revenue chain I gave Todd a minute ago, fuel additives shipments were flat. So if you had flat shipments and maybe we spent a little more in R&D, I don’t have that in front of me. But there's nothing that jumps out to my mind.

Our next question comes from Charles Rose with Cruiser.

This is Charlie Rose. I want to go back to the issue of the industry structure, Teddy. I go back when I saw your company back years ago, when your dad was involved very intimately. And if you go back -- and this was a much more fragmented industry. And now you have Lubrizol, you have Infineon, which is the Exxon-Shell venture, and Oronite and yourselves. Has the industry behaving more oligopolistically, and is there room for a consolidation? If there were, could the #3 and #4 be married? And then, what types of financial targets in terms of leverage ratios? Whether you do a deal or you buy back stock, what are you comfortable with in terms of debt-to-EBITDA issues? And sort of take that to what do you feel comfortable in terms of using your stock or using cash? How do you deals, whether it's for acquisitions or for financial rewards to shareholders? I'd appreciate some of those issues being addressed.

. Sure. Yes, if you have been following the company and the industry awhile, you know that in the early '90s, there were 8 primary competitors, and now there are 4. The chances of 4 going to 3 anytime soon, I think, are pretty slim. Our acquisition focus is, as we've mentioned, is in petroleum additives. Beyond the 4 major players, there are some smaller niche players in the various segments. The fuels area and the industrial areas tend to be the ones where you see some smaller niche players that often have good technology and interesting market access. So that's where our focus is. In terms of...

So you're buying a product line or a niche that's complementary to your existing portfolio, is what your implying?

That's right. Something that will expand our technology or expand our market access. As far as debt-to-EBITDA goes, we -- as I mentioned earlier, we're lower than we'd like to be. We'd like to maintain at least 1x leverage. We would not be afraid of going to something higher in the 2x to 3x leverage range if the right opportunity came along for acquisition. And certainly, using equity is also a tool available to us.

All right. I think you've done a fabulous job, Teddy, I got to tell you. I haven't been around the company in many years, but you've really got a lot to be proud of. And I look forward to -- I want to get reinvolved. But I'm really excited about hearing the story for the first time in a couple of years. It's -- you've done a tremendous job.

I appreciate your words. Thank you for that. We've got an awesome team and that makes me...

Look better.

Well, you got it.

[Operator Instructions] At this time, our next question comes from Todd Vencil with Sterne Agee. L. Todd Vencil - Sterne Agee & Leach Inc., Research Division: Quick followup, David. You mentioned 3 components that impacted you in the third quarter. Can you give us a rough split over the exposure among the pound and the yen and the euro?

I don't have that split. The quarter had several million dollars of negative impact because of exchange. We typically don't discuss it in great detail because we have quarters where it goes our way. So -- but it -- this particular quarter was predominantly the dollar to the sterling.

At this time, there are no further questions in the queue. I would like to turn the call back over to Mr. Fiorenza for closing comments.

Thanks, everyone, for joining us, and we'll talk to you next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.