NewMarket Corporation (NEU) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the NewMarket Corporation Third Quarter 2015 Financial Results Teleconference. 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. So I'd now like to turn the conference over to your host Mr. Brian Paliotti. Thank you. You may begin.

Thank you, Sharon. 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 plan to file our 10-Q later this week and it contains significantly more details on the operations and the 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 $62 million, or $5.08 per share, compared to the net income of $57 million, or $4.53 per 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 for both periods, earnings for this year’s third quarter would have been $64 million, or $5.25 a share compared to $57 million or $4.52 per share. Petroleum additives operating profit for the quarter was $101 million, which is about $7 million or 6.6% higher than last year’s third quarter performance. Total sales for the quarter decreased by 8.3% to $541 million compared to sales for the same period last year of $590 million. The decrease in petroleum additives revenue in the quarter comparison was mainly driven by FX and price customer mix. The FX or foreign exchange impacts are mainly driven by the Euro and Yen rate versus the U.S. dollar and they accounted for $24 million of the revenue reduction with the price customer mix accounting for $25 million of the quarterly change as some prices have reset. The shipments in lubricant additives has declined but were offset by increases in fuel additives globally. In the quarter and through the first nine months of the year, our shipments were essentially unchanged versus 2014. Lubricant additives volumes have slower than expected but we believe the petroleum additives industry long-term growth rate of 1% to 2% hasn’t changed and we don’t see any new trend in the volume data year-to-date. In the third quarter, similar to the first half, we continue to see a benefit from lower raw material cost offset by the foreign exchange. We continue to invest in research and development in Q3 in support of our customer solutions and have increased those investments by $3 million or 9% in the quarter and by $15 million or 15% for the first three quarters. Throughout 2015, we had experienced movement in crude oil, slower economic growth particularly in Asia and exchange rates. Managing through such changes are normal part of our business. We expect our margins to be in the mid to upper teens over the longer term as they have been in recent years as the fundamentals of the industry has not changed. For the four quarters ended September our average petroleum additives operating margins were 17.5% which is in line with our expectations of the performance over the long-term. On the cash flow for the quarter, items of note including funding our normal dividends of $70 million and using more cash to fund the normal variations in working capital. We've bought back 435,400 shares of stock for a total of $171 million in the quarter. We have also announced an increase in our dividend to $1.60 a share, a 14% increase, and have approved a new share buyback authorization of $500 million which is good through the end of 2018. We continue to operate with very low leverage with debt-to-EBITDA remaining below 1.3 times. In Q3, we continue to execute on our capital investments on unidentified projects which equated to $34 million bringing the year-to-date spend to $84 million. This is our plan for capital expenditures in $100 million to $140 million range, which conclude investing in our new manufacturing facility in Singapore as well as several improvements to our manufacturing and armed research and development infrastructure around the world. In August, we announced the second phase of construction in Singapore which includes additional component production units that will more than double our investment in that facility. The Phase 2 construction is scheduled to be completed in 2017. We still anticipate capital expenditures to remain higher than normal range for the next several years in the $150 million plus range in support of our global growth plan which has revised up versus what we had discussed for the last few quarters, primarily due to our phase 2 Singapore announcement. In summary, our business is performing well. It is in line with our long-term view. We continue to invest heavily in research and development and additional capacity to support our customers worldwide and to meet our long-term growth goals. We believe the fundamentals of how we run our business continues to pay dividends for all of our stakeholders. Sharon, that completes our planned comments. We would like to open it up the line for any questions, please.

At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Ivan Marcuse of KeyBanc Capital Markets. Please state your question.

Hi, thanks for taking my questions. I know you just touched it but I missed it. For your CapEx goal you said $150 million for the next several years is that -- does you pay you to find out little bit more, is that part of the doubling of the investment? And then based on that what kind of -- how big of an impact do they have on overall volumes and I guess your profitability how should it ramp up in 2016, 2017, 2018?

Ivan, this is Teddy. We’re trying to give you an indication that we see spending somewhat higher in the next two or three years than we previously told you; it won’t be an even $150 million per year, it depends on the timing, but you can think of it in terms of $150 million a year for three years and be directionally right. It is a lot of our -- a fair amount of that is the second phase of the Singapore project as well as some other additions to capacity. We invest for the long-term. We’re not changing our prior indications of our prior indications of our -- or our prior growth goals that we have expressed to you. We still see the industry growing at 1% to 2% a year. We hope to exceed that by a couple of percentage points, and that's our plan. Again, it may not be year in and year out, but over a long period of time, that's our expectation.

Great. And then, UK, have any of those investments grade and junior creditors have been in Asia so, and there has been much growth elsewhere. So, do you see I guess a possibility or expectation you need to take out some capacity out of Europe and North America, as they sort of replace this whatever you're doing or is that normally how to think about it?

That’s not at all how we see it. With the announcements in capacity increases that we're aware of, we don't see this industry supply demand balance shifting even if a modest growth of 1% to 2%, the industry will need additional capacity over the future. You're right in that, most of the capacity increases that we and others have announced are in Asia, where the largest growth possibilities are but it's also where the [indiscernible] infrastructure certainly in our case is smaller. In terms of capacity, we manage capacity like the business on world-wide basis and as we're adding more, it makes sense to add in the region where we're under-represented and where our lead times are longer than they should be right now.

Do you anticipate your CapEx spending to be funded straight out of your cash from operations or do you think you'll have to take out a little bit of debt just in order to fund these sort of how are you looking at that?

Ivan, this from Brian from operation.

And then I guess, if you look at, I know this year has been sort of volatile in terms of raw material volume bounce up and down and you said there's really been no change, the past several years your would've been in this 29% to 30% making it occasionally 31% to 28%, but it's been 30%, 32%, do you sort of expect the long-term? Has there been anything materially that’s changed in industry where 32% or 33%, or whatever it is sort of going and goes far or do you expect sort of an [indiscernible] in raw materials [indiscernible] go back then sort of 30% plus or minus a couple of percent?

We’re not changing our view on what we told you about operating margins being in the mid to upper teens. I think part of what you see is in the cycle of raw materials and pricing when we’re in a low point in that, you’re going to see higher margin, the margin is at the higher end of that. And when the opposite is true and raw materials and prices rise you will see margins being towards the lower end of that range simply the way the math work on that percent of revenue.

Great. And then last question is, is there anything that has been driving on your fuel additives business, you saw some global growth say if I’m going to be earnest but then your additives were down, your lubricant additives were down a little bit, do you see any destocking or is it sort of the way the shipments fell this quarter versus every other quarter?

Is your question about fuel additives or lube additives?

Probably both. So have you seen any destocking to be one question and the second and the last question would be what is sort of driving the fuel additives growth because it seems like that market really isn’t growing much lot either?

I don’t think we have been seeing any destocking going on. And on the fuel additives side people do drive more when the price of fuel drops and it’s a small change maybe 5% in terms of miles driven when gas prices are low and 5% contraction when they rise rapidly.

Great, thanks for taking my questions.

Sure.

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

Good afternoon, thank you for taking my question. Just a follow-up on what Ivan had been asking in the lube additives side of the business, but your volumes are flat on the last three quarters to year-end or through the current past three quarters and it was actually down the last two quarters, you talk about the industry still being 1% to 2% growth mode, so I understand why the fuel additives is growing although I would be interested in knowing if you’re growing faster than the industry, but any reason why you’re growing smaller than industry so far this year in lube additives?

I would think that the industry overall has seen some general weakness this year on the lube side, that 1% to 2% growth is still what we believe the market supports long-term, but I think we’re seeing some weakness this year. And currently we’re not satisfied with flat shipments but I think it’s some degree of function of industry demand being a bit tempered this year.

Would you just say that it has more to do with the automotive side of the business or more to do with the industrial stationery sort of heavy equipment side of the business, where do you think the industry is slower this year?

I would expect it in both but the industrial side is probably seeing more slowdown.

Okay. Okay. And then second question I had is with regard to the raw material cost you mentioned that there is a benefit in the quarter for the store margin expansion in the year-over-year basis. What was the sort of the benefit on raw materials and is this sort of first of several quarters you’re going to achieve that or the last of several quarter you can achieve that, where are we in the raw material [aid] at the portion of the margin expansion?

Yes, Dmitry, this is Brian again, as we talked about earlier, the raw materials slowly flow through the P&L and there is a little bit of lag. I think the other thing that we just communicated that we did see prices reset. So, I think what you also see is we’re seeing some of that dampened. We will see some of the raw materials flow through but it’s at a much lower rate than have been in the first two quarters of the year.

Okay, so but even with the price reset which you had in the quarter which I think you have identified is something like $25 million on year-over-year basis, you still deliver at a pretty strong margin expansion. So was your raw material benefit sort of twice that, three times that?

Dmitry, I didn’t get back, I don’t have right in front of me. But it wasn’t much different than it had been in the last quarter, more specifically what it looks like in the first quarter, well we had similar margins.

Right, okay I’ll follow-up on that. And secondly your R&D growth that you’ve seen 15% this year, are you going to be sort of satisfied with this level of spending. This level of spending in 2015 or is this sort of similar to your program on fixed capital investment and expanding your capabilities on more sustained basis we can see above revenue growth rate in R&D for a couple of more years.

You should expect us to increase R&D over the next several years but not at the rate that we’re seeing this year.

More than mid-single digit rates.

I’m not sure.

Okay, so would it be fair to say that the rate that’s you’re going to get to after this ramp up is pretty much the level of funding that you need and then you will make adjustments as needed going forward?

Yes, that’s correct.

Okay, thank you very much. That’s all the questions I have.

Thank you.

Our next question is from Paul Langlois with Lord Abbett. Please state your question.

Yes, hi, I see that you did the stock buy, share repurchase in the quarter, I was curious what’s your goals are on leverage if there is any sort of maximum leverage that you would go to and also what’s your views on your ratings are and where you feel comfortable?

Paul, we operate and operate in between one and one half times and that’s what we’ve done over the last few years borrowing any acquisitions that may drive us to something higher than that but that’s the range that we currently go comfortable operating in. Go ahead.

These current rates in this kind of what we should expect to see going forward?

Yes.

And in regards to ratings?

What’s your question?

Right now, you sort of in the mid-BBB area that’s kind of are where you would like to stay I assume?

Yes, I mean we would like to stay where we are at or is would like to be continuing at that range as we’ve been over the last few years.

Okay. Fair enough. Thank you.

Our next question is from Todd Vencil with Sterne Agee. Please state your question.

Hey guys, just couple of follow-up housekeeping questions. Can you give me the breakdown between lubricants additive sales and fuel additive sales that usually put in the Q, Brian?

Yes for the quarter? Yes for the quarter lube add was negative seven and fuel add was positive seven.

Okay and on the absolute level of sales you get to $536 million.

So negative $7 million as I said on lube, positive seven on fuel, negative $25 million on selling including mix and negative 24 on currency.

Yes, I get that. I was just looking for the total sales amount to get to $536 million total sales in strong additives.

Sorry I’m not sure with that.

I’ll follow up with you offline. Thanks appreciate it.

Mr. Paliotti, there are no further questions at this time. Would you like to make any closing remarks?

No, thanks everyone for calling in and we'll talk to you next quarter.

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