NewMarket Corporation (NEU) Q1 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the NewMarket Corporation’s First Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A 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, Mr. Brian Paliotti, Chief Financial Officer for NewMarket Corporation. Thank you. You may begin.

Thank you, Diego, and thank you to everyone for joining us this afternoon. With me today is Teddy Gottwald, our CEO. As a reminder, some of the statements made during this conference call may be forward-looking. Relative factors that could cause actual results to differ materially from those forward-looking statements are contained in our earnings release and our SEC filings included in our most recent Form 10-K. During this call, we may also discuss non-GAAP financial measures included in our earnings release. Our 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 10-Q towards the end of April. It will contain significantly more details on the operations and performance of the company. Please take the time to review us. Our comments today will be referring to the data that was included in last night’s press release. Net income was $64 million or $5.14 a share compared to net income of $58 million or $4.43 a share for the first quarter of last year. Earnings for both first quarter periods include the impact of valuing an interest rate swap at fair value. Excluding the special items from both periods, earnings for this year’s first quarter would have been $65 million or $5.26 a share. This is an earnings increase of about 11% and an EPS increase of 16% from last year’s performance. Petroleum additives operating profit for the quarter was $105 million, which is $9 million or 9.2% higher than last year’s performance. Sales for the quarter decreased 3.4% to $555 million compared to sales for the same period last year of $574 million. The decrease in revenue in petroleum additives in the quarterly comparison was primarily driven by foreign exchange. We did achieve record Q1 shipments which represented a 1.5% increase versus a very strong Q1 of 2014. The shipments are characterized by a small reduction in lubricant additives, offset by an increase in fuel additives. Of the $19 million reduction in revenue, FX accounted for more than the entire decline at $21 million. The biggest impacts came from the euro and yen rates versus the U.S. dollar. Higher shipments and price mix were the favorable offsets to the FX impact. In the first quarter, we saw a substantial benefit from lower raw materials cost, offset somewhat by foreign exchange, in fact [ph], I just described. As we have said before, we tend to see a short term raw material benefit when crude oil drops and a penalty when it moves up. Many but not all of our raw materials move in the same direction as crude, often falling behind crude changes by two to five months. While the last several months have seen unusual swing - large swings in crude oil and exchange rates, passing [ph] through such changes are a normal part of our business. We expect margins to be in the mid to upper teens over the longer range term and we have seen this in recent years. On the - through the cash flow for the quarter, items and notes including our funding of normal dividend was $17 million and using more cash to fund the normal variations in working capital. We bought back a nominal [ph] of 2,600 shares or $1 million of stock back in the quarter. We continue to operate with very low leverage, with debt-to-EBITDA remaining below 1. In 2015, we expect to see an increase in the level of our capital expenditures in the $100 million to $140 million range which includes the anticipated earning on our new manufacturing facility in Singapore, as well as several improvements to our manufacturing and R&D infrastructure around the globe. In Q1, we ramped up that spending to $20 million. We expect capital expenditures to remain in the higher than normal range for each of the next several years, or the $80 million to $120 million range in support of our growth plans. This is no change from the position that we discussed at the end of 2014. Over the past several years, we have made significant investments to extend our capabilities around the world. These investments have been in people, technology, technical centers and production capacity. And we intend to use those new capabilities along with the new investments mentioned to improve our ability to deliver the goods and services that our customers value and to grow shareholder value. Diego, that concludes our planned comments. We’d like to open up the lines for any questions, please.

Thank you, sir. [Operator Instructions]. Our first question comes from Dmitry Silversteyn with Longbow Research. Please state your question.

Good morning, gentlemen. Congratulations on a great start to the year.

Thank you.

I guess it’s good afternoon for now.

All right. A couple of questions. First of all, you’ve talked about raw materials being a 21 - sorry, not the raw materials, foreign exchange being a $21 million headwind. So that’s probably about 3.7% or so downside. The remaining 1.2% or so price mix being negative with that [ph], would that remain in price or remain with mix that net of - when looking [ph] at comps year-over-year?

Dmitry, the reduction in revenue was $20 million and FX was $21 million of the entire change.

I understand that but you also had a 1.5% improvement in volume, right? So for new shipments [ph] as you call it. So the price mix then by mathematics works out to be a $4.9 million reduction - 4.9% reduction, I’m sorry. So I’m just wondering if that was price or mix or a combination of both.

It was a combination of both.

Okay. So your prices have started to move down a little bit as raw materials have given you room in [ph] margins to bring pricing down?

Yes.

Okay. Secondly, in the fourth quarter conference call you mentioned a little bit of a inventory collection by customers and you talked about that being one of the reasons probably for [indiscernible] year-over-year in the fourth quarter. And is that trend pretty much concluded or has it accelerated or is it done? Can you talk about customer [indiscernible] and what you can report [ph] from that as far as their position with - in terms of their inventory things or long or short yield products?

Yes, I think, well, in the first quarter, what we saw normal order patterns, I don’t think there’s anything fundamentally different than we’ve seen in other quarters. I mean, what we talked about in the fourth quarter, we didn’t see any of that as of the first quarter. We saw normal patterns.

Okay, okay. And in terms of pricing, are you seeing any sort of deepening out or flattening out of price successions or is that all ready [ph] for you and should we expect sort of this headwind, if you will, to get stronger or pretty much stay at these levels of what’s called low single-digits?

I think the first quarter is a pretty good indication of what we’ll see across the balance of the year.

In terms of the components of other revenues?

That’s correct.

Okay. And then I have a question and I’ll get back into queue. You gave a guidance of - I think previously you talked about $100 million on this call. You talked about $120 million. I mean you’ve had your [indiscernible] due - find new, more projects to invest in during 2015 and you guys will think about your CapEx investment this year.

There’s nothing fundamentally different. We’re continuing to look at the opportunities to grow the company and just revising the reins as far as what we see as standing going forward. You guys [indiscernible].

Okay. Thank you very much.

You’re welcome.

Thank you. [Operator Instructions] Our next question comes from Ivan Marcuse with KeyBanc Capital Markets. Please state your question.

Hi. Thanks for taking my questions. Real quick, how much were your raw materials down in the quarter on a year-over-year basis?

Ivan, as you know we don’t go into the details in the cost to goods sold.

Okay. If you look at your R&D path on a year-over-year basis, I know it can be lumpy quarter-to-quarter, is there anything special there or at this level, I guess $39 million, $40 million. Would you expect that to sort of continue for the remaining of the year? Or how would you sort of expect that R&D and the G&A spend?

Sorry, your expectation is that the purpose of both funding in both of those is exactly where we had anticipated and crossed it down to the year we expected to get those levels.

Got you. And then if you look at your - one thing I noticed is a small part of the business, but how were the other - there is that double when it typically has been in the last several quarters. Is that just a matter of shipping or is there something in there that timing or maybe some second quarter sales falling to the first quarter or how would you take that?

Ivan, it’s Teddy. As you probably are aware, those are small volume, high value shipments. And the patterns are irregular. I wouldn’t rate anything into it. It’s just a big higher quarter.

Okay. So it’s like it goes back into that sort of $2 million-ish type of run rate that’s been inferred on the last several quarters, correct?

Right.

Got you. And then last question. More I guess modeling, what’s your best guess at it at the tax rate for the remainder of the year? And thanks for taking my questions.

Yes, Ivan, I think the first quarter is a pretty good indication there hasn’t been any movement on the R&D tax credit. So I think the first quarter pretty much represents where we think it’s going to be.

Great. Thanks.

You’re welcome.

Our next question comes from Dmitry Silversteyn with Longbow Research. Please state your question.

It appears you didn’t quite expect to be out in the call, real quickly. But I do have a question on inventory. We’ve had some inventory reduction through 2014 for you guys, the best thing to be more sort of business ad than anything else. I would’ve expected it with lower base little pricing that you would have worked off in your inventories as well, but on a year-over-year basis, so that happens. So can you talk about sort of - it’s hard to measure inventories when foreign exchange and raw material pricing are moving as much as they are this time around. If you were to think about it in unit volumes, in units sort of the way you think about your volume shipments, where your inventory units down materially year-over-year, sequentially or [indiscernible] can you talk about sort of your inventory condition.

Dmitry, I think you might have answered the question. It’s pretty dynamic with FX and raw materials. But as far as is there any change in the way that inventory is viewed in the first quarter with another quarter in this first quarter this year, I would say no. But as you stated, with raw materials and FX, the inventory value as you can see was down a little bit quarter-over-quarter. But there’s no difference in the patterns, same as what we see from a shipments perspective.

Okay. So if you’re sort of looking at units, your inventory did go up in the quarter.

We didn’t --

It’s a non-seasonal weight.

We didn’t see anything fundamentally different in our inventory values.

Okay. Very good. And then just sort of to - this is calculated number for me, but it looks like you have about $12.7 million shares outstanding in the quarter, which looks to be an uptick of what you have in the second half of 2014 obviously on dilution given the stock price. Have you got vast stock [ph] during the quarter and if so, how much and how much do have you left in your authorization?

Yes. The outstanding share, Dmitry, is 12.4 at the end of the quarter. And across the quarter - 12.4. And we spent $1 million, possibly $1 million in the quarter and brought back approximately just a little bit north of 2,600 shares.

Okay. So that’s obviously a slower pace for you than you have to do [indiscernible] sort of market timing or just use of cash. What’s different this quarter versus last year if you have to sort of complete your authorization pipeline 2016 which would imply significantly higher level of buybacks in the balance of the year?

Dmitry, we have about $250 million left going to authorization. And that’s good through the end of 2016. I wouldn’t read too much into it. The way we - our decision making is still the same. We look at cash needs, internal needs, the possibility of acquisition. And the relative price of the stock and we make decisions today. So on all of those factors rolled into one. It is our desire to use the authorization before it expires at the end of 2016.

Okay. Given the high stock price, Teddy [indiscernible] companies in this industry haven’t done it for years. But there was one major company [indiscernible] thoughts about [indiscernible] and perhaps improving the liquidity.

You know, we talk about it periodically. And my answer on that really to whoever asked the question is we’ll split it when we come up with a good reason to do that. If you have some thoughts on it offline you’d like to share with us, let us know. But most of the folks we talk to or most of the investors that we talk to are pretty indifferent on whether we split or not.

I wouldn’t disagree with you, Teddy, given that [indiscernible] roll in the market. [Indiscernible] they don’t care about the stock and the price as much when the price of the stock I should say. The announcement that I referred to of a stock split instead of [indiscernible] curiosity, I think you maybe [indiscernible]. So that’s why I checked. All right. Thank you, guys. I’ll get back into queue again.

Thanks, Dmitry.

Our next question comes from Todd Vencil with Sterne Agee

Hey, guys. Good morning. [Indiscernible] jumping on the question Dmitry I think was getting at around the question on the share count. I’m coming up with a different number on EPS than what you guys reported once you backed out the, we call the slot [ph]. What was the after tax effect on the stock run, do you know that?

I don’t have any number in top of my head.

Okay. Is it safe to assume that we’re selling tax at a different than the rest of the business?

Are you talking about the interest rates swap pack?

Okay. Okay. Thanks very much.

[Operator Instructions] There appears to be no further request for questions. I’ll turn the conference back over to management for closing remarks. Thank you.

Thanks, Diego. Thank you and thank you everyone for joining. And we’ll talk to you again next quarter.