NewMarket Corporation (NEU) Q2 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the NewMarket Corporation Second Quarter 2016 Financial Results. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brian Paliotti, Chief Financial Officer. Thank you, Mr. Paliotti. You may begin.

Thank you, Doug, and thanks to 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 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 filed our 10-Q earlier today. It contains significantly more details on the operations and performance of the Company. Please take time to review it. Our comments today we'll be referring to the data that was included in last night's press release. Net income was $64 million or $5.43 a share, compared to net income of $59 million or $4.72 a share, for the second quarter of last year. Earnings for both second quarter periods included the impact of value and interest rate swap at the fair value. Excluding that special item from both periods, earnings for this year's second quarter would have been $65 million or $5.50 a share. This is an earnings increase of about 13% and an EPS increase of 18% from last year's performance. Petroleum additives operating profit for the quarter was $103 million, which is about $8 million or 9% higher than last year. Petroleum additives sales for the quarter decreased 7.4% or to $516 million, compared to sales for the same period of the year $557 million or a $41 million reduction. Reduction in revenue was accounted for from price and shipments for the majority of the change. Petroleum additives shipments for the second quarter of 2016 were down 1.5% from the same period last year. We experienced decreases in lubricant additive shipments in North America and Latin America, with fuel additive increases in North America and Asia-Pacific. Through the first six months of the year, our shipments were down 2.4% versus 2015. Lubricant additive volumes have been slower than expected, with fuel additive volumes being stronger than expected. We believe the PA industry long-term growth rate of 1% to 2% hasn't changed and we don't see any new trend of the volume data year-to-date. Onto the cash flow for the quarter, items of note including funding our dividend of $19 million and variations of working capital. We continue to operate with very low leverage, with debt to EBITDA at 1.3 times. For 2016, we expect to see an increase in the level of our capital expenditures to a level higher than 2015, which includes the anticipated spending on our Phase 2 Singapore investment, as well as improvements to our manufacturing and R&D infrastructure around the world. For the first half of 2016, we have ramped up spending to $64 million. Phase 1 is officially open in Q2 and Phase 2 will be commercially ready in 2018. We expect capital expenditures to remain in a higher-than-normal range for each of the next several years in support of our growth plans. This is no change from the position we discussed over the past several quarters. In summary, our business continues to perform very well and we are pleased with its overall performance, as we continue to operate this business in a business climate that was marked by slower world economic growth and a strong US dollar. We remain focused on the long term and are investing heavily in R&D and additional capacity to support our customers worldwide to meet our long-term growth goals. We remain committed to our safety-first culture, providing customer-focused technology-driven solutions, and to a world-class supply chain to meet our customers’ growing needs, and this approach will continue to be beneficial to our shareholders. Doug that concludes our planned comments. We would like to open up the lines for questions, please.

[Operator Instructions] we do have a question from the line of Dmitry Silversteyn from Longbow Research. Please proceed with your question.

A couple of questions, if I may. On the pricing outlook for the second half of 2016, what do you see, we got a little bit of a modest movement in base oil. I'm sure that at least led to some more pricing stability for you. Do you expect pricing to remain at these levels for the balance of the year or perhaps you are going to need to increase them as the year ends?

Dmitry, we expect margins to be in the mid-to-high teens, as we have experienced. I don't see any significant change.

Okay, so as I'm looking forward to the second half of the year, I'm continuing to expect a decline in lube volumes and declining pricing as well? Is that what you are basically telling me? It is just the raw materials are going to benefit the margins?

Dmitry, what I am saying is that from a margin perspective, we expect the margin to be in a normal range. From a volume perspective, we are working in a difficult economic time. We have seen some reductions in some regions, a little bit of a sluggish nature in some of the regions. So we don't expect volumes to be anything but over the long term a 1% to 2% growth, and we expect to do a little bit better than that.

Okay, I understand the long term, but we have been posting negative volume comps for, what it is, now going on a year and a half? So, it is eating into that 10-year timeframe that you talk about normalized volume growth. So I'm just wondering if it is a question of the customers that you are with, the regions that you are in, the product lines that you're on. We have seen very good results this week from an end customer of yours or at least in the industry that is an end customer of yours. There were some very good results, so people are growing in a slowing environment. So I'm just wondering if there are a year and a half of negative comps, where do we go from here.

Dmitry, this is Teddy. Your observations are very, very real and we are very aware of this, and frankly disappointed that we are not seeing more growth in our volume. I don't see it as being anything fundamental. I think there is - you mentioned a number of possible causes and I think we are seeing pieces of each of those, but frankly we just need to do a better job in this sluggish environment of bringing in more growth. And that's what we are [technical difficulty].

Okay, Teddy, that's fair. Let me ask this question. As you look at your, obviously, you are spending a lot of money on R&D and new product development. As you look at your innovation index, how does it compare, where does it stand currently and how does it compare to last year at this time, for example?

As far as our R&D investment, as you know, this is a technology business. We invest for the long-term, and obviously we are continuing, as you can see from the R&D investment, to invest heavily for new products and development solutions for our customer long-term and don't see a change in that going forward.

No, no, I understand that, but in terms of, for the vitality index, the Company's key percentages of sales coming from products developed five years or so, typically, I am assuming you keep one as well. You have provided, I think, updates on that periodically, so I am just asking where that stands currently versus a year ago.

That's not something that we track very often. We do look at it, certainly, but if I had to tell you where I think we are compared to last year, I would think it might be down slightly because a lot of the investments we are making right now are related to industry changes that are coming over the next one to two years, significant industry changes. So, more of our R&D dollars right now are geared toward products that weren't coming out this year, but are coming out over the next couple of years.

Okay, okay. Thank you for that. And then one final question, to add on the share count. You were somewhat aggressive over the course of 2015 buying back shares, not so much so far in 2016. What's your plan for executing your share buyback?

We've talked about keeping debt to EBITDA in the 1 to 1.5 times range, with 1.5 being probably better than 1 for a number. Right now, we're at 1.3. We have a lot of CapEx that Brian has mentioned. We are patient in terms of looking for acquisitions. We are also patient in terms of buying in shares. So, we just have to look at all of those factors, weighing the outlook for CapEx, acquisitions, the current relative price of the stock, and all of that to factor in. So, I am telling you how we think. We obviously don't state in advance before we do buy shares.

Okay, I understand. Thank you.

Our next question comes from the line of Ivan Marcuse from KeyBanc Capital Markets. Please proceed with your question.

This is more of a longer-term one. You mentioned that there is a couple of things over the, next couple of years that you're working on. Is there any sort of initiative where engine change or some sort of change in the industry that you guys are looking at there's going to be a fairly significant opportunity for you or I guess if you can talk about a couple of these changes that you guys have been working on, looking out for the next couple of years.

Sure. The industry, as you well know, Ivan, has certain specifications, which often are just minimum specifications for playing the game. And anytime there is a significant change in those specifications, it means a lot of new investment in R&D, a lot of new products. We are seeing them right now in both the heavy duty diesel and the passenger car aspects. They do present new opportunities, but they generally don't result in significant change in the overall competitive picture. We don't talk about those specs a lot because we are not a spec driven company. We are a value driven company and we develop products that provide value for our customers, and specs are just a ticket to the game, albeit a very expensive one that we all need to pay attention to as the changes come, because they always result in increased demands on our products.

Great, thanks for that. And then, I guess even more longer term, you talk about you still think the industry is growing 1% to 2% over the next decade or so. There is a few secular things that are going on. Is there something to keep an eye on in terms of more synthetic fuel, so cars are changing their oil more or less? I guess while it is extremely tiny right now, but EV vehicles are continuing to get more popular, so is that an opportunity or a negative? And where do you see the growth offsetting that that is going to benefit you guys over the next decade or so?

Yes, those factors you mentioned are all baked into the 1% to 2% increase that we see. Some of the major drivers of growth would be growth in the developing and emerging markets China, for instance, and the growth in the transportation fleet in countries like China. And even though the growth is slow, we are still seeing significant expansion of the car and truck fleet there. Also, the increased demands that are placed on motor oils and other lubricants, demands that are driven by the need for improved fuel economy in particular and some of the operating conditions of these newer engines drive increases in the needs for additives over top of the growth of lubricants or fuels, the end markets there. So, yes, we are seeing extended drain intervals. We have been seeing those for some time now. We are seeing alternative fuel vehicles. We are seeing hybrids and so on, but all of that is factored into the equation.

Great. Thanks for taking my questions.

There are no other questions in queue. I would like to turn the call back over to management for closing comments. [Ends abruptly]