NewMarket Corporation (NEU) Q4 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the NewMarket Corporation's Fourth Quarter 2015 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. It is now my pleasure to introduce your host Mr. Brian Paliotti. Thank you, Mr. Paliotti. You may begin.

Thank you, Michelle, 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 will 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 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 intend to file our 2015 10-K towards the middle of February. It will contain significantly more details on the operations and the performance of our company. Please take the time to review it. I will be referring to the data that was included in last night’s release. All comparisons I mentioned will be the fourth quarter of 2015 to the fourth quarter of 2014, unless I indicate otherwise. Now into the fourth quarter results, our net income was $53.9 million, which calculates to earnings of $4.50 per share. Net income for the fourth quarter of 2014 was $52.1 million or $4.17 per share. Excluding the special items detailed in the release from all periods, earnings for this year's fourth quarter were $52.3 million or $4.44 per share, an increase of $0.14 compared to last year. Petroleum additives operating profit for the quarter was $75.3 million versus [ph] a record in 2014 fourth quarter of $85.5 million. Sales for the quarter were $476.7 million, down compared to the sales for the same period of last year of $547.9 million, due to lower shipments, foreign currency exchange and changes in selling price and mix. Shipments were down 4.3% versus the Q4 of 2014. This decline, which represents the lowest level of quarterly shipments of three years, was primarily due to decreases in lubricant and fuel additive shipments in North America. The rapid decline in oil prices in the fourth quarter likely related to some customer de-stocking in anticipation of lower base oil prices. A couple of other items of note for the quarter were the effective tax rate and cash generation and use. The effective income tax rate for the fourth quarter of 2015 was 20.3%, down from 28.8% last year. The rate in the fourth quarter of 2015 was lower, primarily due to decreases in tax rates from some of our foreign subsidiary and an increase in the tax benefits from our research and development activities in the U.S. and Europe. The research and development tax credit in the U.S. was half during the fourth quarter of 2015, retroactive to the beginning of the year, so the full amount of the year was recorded in the fourth quarter. During the quarter, we utilized the cash generated by investing $42.3 million as we execute our long range capital plan, repurchasing $17.3 million of our stock and funding $19.2 million of dividend. We purchased 44,778 shares in the fourth quarter and at average price of $385.04 per share. That covers the fourth quarter items I wanted to address. I have a few items I would like to comment on for the full year, but I do not plan to cover all the information in the press release. We included a robust discussion in the release about the significant factors that affected the quarter and the full year comparison like foreign currency and the cost of raw materials, but we do not view these items as out of the ordinary. They are factors that are all companies deal with and we manage them in the normal course of business. That being said, we do not plan to cover any additional details concerning these normal factors affecting quarterly swing as we manage our business for the long-term. Petroleum additives shipments decreased 1.2% for the year, with increases in fuel additive shipments, primarily in North America, offset by declines of lubricant additives in all regions except Latin America. Shipments were below our expectations for both, the quarter and full year periods, as demand for lubricant products trended lower in the face of continued general weakness in the global economy. In addition, solid operating performance for the year was overshadowed by the impact of foreign exchange. We make substantial investments each year in research and development in order to provide our customers with innovative products and solutions to meet their increasingly demanding businesses. In 2015, our R&D investments reached their record $158 million. These investments will continue in 2016 as we continue to invest for the long-term growth. Our business continues to generate strong cash flow during 2015; we paid dividends of $70.8 million on capital expenditures of $126.5 million and repurchased 501,261 shares of our stock at a cost of $197.9 million, at an average price of $394.71 per share. At the end of 2015, we had $482.8 million remaining on our stock repurchase authorization from our Board, which expires on December 31, 2018. We ended the year with very low leverage with debt to EBITDA at approximately 1.25 times. For 2016, we expect to see an increase in capital expenditures versus 2015. This includes ongoing spend on the completion of our Phase 1 of our manufacturing facility in Singapore, and the continuation of the Phase 2 investment at that site. Phase 1 of the Singapore facility is nearing mechanical completion, with commercial shipments expected this spring. The Phase 2 investments will be commercially ready in late 2017. These new investments enable us to provide quick and effective service to our Asia Pacific customers as well as those in India and the Middle East. We will also be investing in several improvements to our manufacturing and research and development infrastructure around the world. We expect the capital expenditures to remain in the higher than normal range for each of the next few years to support our business plan. Over the past several years, we have made significant investments to expand our capabilities around the world. These investments have been in talent, technology and technical centers and production capacity. We intend to use these new capabilities to improve our ability to deliver existing services that our customers value and to expand our businesses and improve profits. Our business continues to generate significant amount of cash beyond what is necessary for the expansion in growth of our current offerings. We regularly review the many internal opportunities we have utilized this cash both, from a geographic and product line perspective. We continue our efforts to invest in potential acquisitions as both, use for this cash and to generate shareholder value. Our primary focus in the acquisition arena remains in the petroleum additives industry. It is our view that this industry will provide the greatest opportunity for a good return to our investment while minimizing risk. We remain focused on this strategy and patiently evaluate any future opportunities. We will continue to evaluate all alternative uses of cash to enhance shareholder value, including stock repurchases and dividend, and we expect to continue to operate with modest leverage in the 1 to 1.5 times range. Our stated goal is provide a 10% return per year to our shareholders over any five-year period, which is defined EPS growth plus dividend. We may not necessarily achieve a 10% return each year and 2015 was such year. Unfavorable exchange rates and softer industry demand have worked against us at a time when we have a great need to invest in the developing products to meet new upcoming market demands and pursue specific growth opportunities. As we look ahead, we expect our petroleum additives segment to deliver solid results in 2016. We believe the fundamentals of the industry remain unchanged, with the market growing at 1% to 2% rate and we expect to exceed growth rate over the long-term. We are making investments to position ourselves for the future. Our capital spending is 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 repurchases and dividend policy have been effective ways to use cash flow and modest leverage to improve shareholder return. Michelle that concludes our planned comments. We will now open up the line for questions.

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Eugene Fedotoff with KeyBanc Capital Markets. Please proceed with your question.

Good morning. Thank you for taking my questions.

Good morning.

Could you provide some color on where was FX in the quarter impact both, on revenue and operating profit line and also the price mix impact?

On a revenue basis in the fourth quarter, the currency impact was $17 million and the price impact was $29 million.

What was the FX impact on operating profit?

The impact of those two on the operating profit, I do not have those right here, but the impact of the currency and the shipment for the revenue was as I stated.

Also, can you give us breakdown between lube additives and fuel additives - growth - actually decline in the quarter?

As far as the breakdown between lubes and fuels for shipments in the quarter, we do not share that information.

Okay. Are you seeing pickup in customer activity in the first quarter? Did you think de-stocking that you saw in the fourth quarter, is it mostly over?

This is Teddy. We do not have any way to really firmly determine the amount of de-stocking or how long it goes on. We just know that when oil prices drop 40% in a two-month like they did in the fourth quarter, it is very likely that some of our customers chose to run their tanks down in anticipation, in particular of lower base oil prices, but that impact normally is a short-term impact and does not last beyond a month or six weeks period, so our anticipation would be that it would not continue.

Okay. Thank you. I guess a question on sort of do you think you owe to any market share and lubricant additives in 2015. If that is the case, do you expect to regain that market share in '16, or the market overall is - in '15?

I do not think we lost any share in 2015. I think the market was flat to maybe slightly down in 2015. Too early to get any outside viewpoint on that, but if we peal back and look at our business and where the changes occur, we do not believe we lost any market share. We did not gain any either, which is disappointing to us.

Just a last question on gross margin should grow material, stay at current levels, do you expect gross margin to stay 32% level through 2016?

We would expect the gross margin to be near to what we had in 2015.

Got it. Thank you.

Our next question comes from the line of Todd Vencil with Sterne Agee CRT. Please proceed.

Thanks. Good morning, guys.

Good morning.

Good morning.

Brian and Teddy, do you guys feel like that 15.8%, which really matters operating margin in the fourth quarter, I mean, was there any kind of cost price benefit in there? I know your crisis tend to react to the same things that your costs do, but I mean if you catch a little temporary tailwind in there or was it basically neutral?

That was basically neutral, Todd. We did not see any bumps or declines.

Okay, all right. Just thinking about how product prices have moved kind of through the year, if prices stay where they are now, how deep into 2016 would we be looking at negative year-over-year comps?

I do not know if we can answer that at this point. I can tell you that if you look at the fourth quarter petroleum additive margins over the last few years and then what happen in the first quarter in the subsequent quarters over the course of last few years that we normally see that the fourth quarter has a deepening affect on overall operating margins and we expect to seeing the similar profile going into '16.

Okay. That is helpful. I guess, I am not sure you said that loud, you might have - and I think so I am thinking about it, but if long-term outlooks for operating margins in petroleum additives still the mid to high teens?

That is correct.

Given what is going on and what is going and whatever you think is going to go on with prices and volumes and cost this year, is there any reason to think that 2015 would be any different than that long-term expectation?

No. Same expectation mid to high teens for the business.

Okay. Final one from me, you mentioned that you are going to keep spending on R&D, which is as anticipated, is that recent run rate of about $40 million a quarter. Is it a reasonable assumption to use?

I think that is a reasonable assumption to use going forward.

Okay. Thanks a lot guys.

Thanks, Todd.

[Operator Instructions] Our next question comes from the line of Dmitry Silversteyn with Longbow Research. Please proceed with your question.

Good morning, guys. Thanks for taking my question. A lot have been handled by the first two of people asking, but I want to follow-up on a couple of things. The lube additives business looked like for pretty the much the full year, volumes they were down 1% to 2% and some of the growth happened in fuel additives during those quarters. Was this decline sort of accelerated in the fourth quarter to give you 4.2% down or was it entirely the fuel additives that declined after growing in the quarter and you still had lubes sort of declining to the normal 1% to 2% we saw in the previous three quarters?

Dmitry, this is Brian. They both accelerated a little bit. As you stated accurately, we saw a fuels kind of grow across the first three and lubes has been down. They both accelerated versus those paces in the fourth quarter, so lubes was down a little bit more and fuels was down more than the first three had grown.

Okay. In each instance [ph] your customers apparently sort of worked off their inventories in the fourth quarter. Would it be fair to assume that you guys took down your inventories to slog on kind of maybe short inventory heading into the first quarter expecting lower base oil prices?

No. Actually, we did not run ours down. We are prepared for 2016. Again, this is a normal quarterly variation. We do not really manage it quarter-to-quarter like that. I mean, we are looking across what the needs are for 2016 and manage the inventories that way.

I mean, I understand those normally do it - and as you pointed out, got a 40% decline in oil in one quarter, so I thought maybe this was abnormal enough. Okay. I am looking at the Singapore plants you talked about the - the extension of Phase 1 coming on stream this spring. What would they sort of entail in terms of additional capacity either in the region or for yourselves on a corporate level and that sort of outlook would you expect to fill the capacity before opening up to next year. I am assuming Phase 2 is more of additional product rather than extension of production of existing products?

Yes. Phase 2 is a different slate of products than Phase 1.

Right.

Both of them combined along with de-bottlenecking and some additional projects are designed to give us the growth capacity we need to meet our goals and our goals are to exceed the market growth rate by a few percentage points, so we are talking about mid-single digit volume growth over a five-year period is what we are gunning for and the capacity additions allow that to happen.

Okay. I guess my question was for the price for the products that have been made in Phase 1 and will be Phase 2 that this capacity addition sounds like; we will increase both - [ph] for those products will increase by about 50%. Would that be the right takeaway from what you just said or 25%, something like that?

No. Dmitry, I think, what we are trying to articulate is that the capacity that we are bringing on-stream is part of the components tree of the world [ph] plan. As far as what we are looking at as far as the long-term, this is just reinforcing us to grow to that few points better, higher than the market over the long-term. That is what we are bringing the capacity on to do.

Right. I guess, Brian, what I was getting at is, if you are going to be growing at 4% to 5% and I am sure you do not want to be extending plans every year, if you have a five year, let us say timeline built into the extension, it sounds like it was about 25% addition for your production for those particular products. That is what I wanted to confirm. You mentioned a couple of times both, in the press released and the call today that you were somewhat disappointed in the volumes and the performance in 2015-2016. Can you talk about sort of more specifically what disappointed versus your expectation and why you think the results were not up to your expectation a year ago and what are you doing to sort of make sure that you are growing that above market rate in 2016 and for the next five years?

I think, the market softness was a bit disappointing. We were a successful as I would have like to have seen us and picking up additional business at the rate that we set our goals for. Mostly though I would have said our business performance was very solid. We were please with most of the business performance in of course the 2015. The biggest disappointed was the impact of FX, and our inability or our delays and dealing with that.

Thanks, Teddy. Do you think the stronger dollar and therefore product competitive position perhaps by some of your international competitors was one of the reasons you were not unsuccessful in picking up business while you stay disciplined in pricing?

I do not think it is FX-related, but I am not going get into pricing or our strategy.

Okay. All right, thank you very much.

Thank you.

There are no further questions at this time. Mr. Paliotti, I would like to turn the floor back over to you for closing comments.

Thanks, everyone for calling in. We will talk to you next quarter.