NewMarket Corporation (NEU) Q2 2013 Earnings Report, Transcript and Summary

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

Thanks, Kevin, and thanks for joining Teddy and I today to discuss our second quarter performance. 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 those factors can be found in our 2012 10-K. We filed our 10-Q this morning. It contains many more details on the operations of our company. Please take time to review it. I will be referring to the numbers that were included in last night's release. And all comparisons I mention will be the second quarter of '13 to the second quarter of '12, unless I call it out otherwise. Net income for the quarter improved to $64 million, or $4.81 a share, compared to $55.3 million or $4.12 last year. Net income for '13 includes the benefit of a lower effective tax rate mainly due to the passage of the R&D tax credit extension for '12 and '13 in January of this year. You'll note that the net income for all periods in the press release includes the results of discontinued operations and certain other item's detail. The discontinued operations represent the operation of the real estate segment, which sold its office building on July 2. We expect to recognize a gain of about $36 million or $22 million after taxes in the third quarter of '13 related to this transaction, and we'll clear about $123 million of cash after taxes are paid. Please reference our previously released 8-K for more details on Foundry Park I. All periods also include the impact of valuing our interest rate swap at fair value. And the 2012 period include the loss on the early extinguishment of debt. For the second quarter of this year, earnings, excluding discontinued operations and special items, amounted to $61.3 million or $4.61 a share compared to earnings on the same basis last year of $62.7 million or $4.68 a share. On the same basis, earnings for the first half of this year were $128 million or $9.58 a share, which is down about 1% from last year's record first half performance. Petroleum additives net sales for the quarter of $581 million decreased $3 million or about 0.5% in the comparison. From a regional perspective, all changes were relatively minor. The small decrease in revenue was the result of higher shipments of lubricant additives, lower shipments of fuel additives, unfavorable foreign currency impacts and some changes in selling prices. Overall petroleum additive product shipments were up about 1% between the 2 quarters. When comparing the second quarter of '13 to the first quarter, shipments were up about 6%. The unfavorable impact due to currency is mainly due to the dollar strengthening against the yen in this period. Petroleum additives operating profit increased $900,000 in the quarterly comparison. For the four quarters ended June, operating margin was 16.7%, which is in line with our expectations of the performance of our business over the long term. In a simple view, we made more money at the gross profit level. And as a matter of fact, this was the highest quarterly gross profit on record, which was based on a good mix of business and slightly higher volumes. And then we purposely reinvested a large portion of that gain on R&D in support of our customers' need. During the quarter, we repurchased 14,600 shares at an average price of $258.21 a share. We ended the quarter with 13.3 million shares outstanding. We have about $223 million remaining on our repurchase authorization, which is good until the end of 2014. Cash at the end of the quarter was $73.5 million. We reduced our debt by $56.6 million since the beginning of the year. Our business continues to generate significant amounts of cash in excess of what is needed to implement our business plan. There is a summary of cash flows included in the press release that details the overall cash for the first 6 months. Items of note include working capital, which swung to a source of funds in the second quarter and a return of funds associated with our interest rate swap, which is included in that line called Other on that statement. We estimate our total capital spending for 2013 will be in the $70 million to $80 million range. We continue to operate with very low debt leverage. Our debt-to-EBITDA ratio at the end of the quarter was below 1x. We had about $630 million available on our $650 million revolver, which affords us the flexibility we need to operate and grow our business. We're very pleased with our first half results. The results reinforce our confidence that our customer-focused approach to the market is the path in which to continue. We believe the fundamentals of how we run our business, our safety-first culture, customer-focused technology-driven products, world-class supply chain and a regional organizational structure to better understand our customers' needs will continue to pay dividends to all our stakeholders. We continue to have expectations that our petroleum additives segment will deliver improved results in 2013, after having closed a record operating profit for each of the several last years. Our business continues to generate significant amounts of cash beyond what is necessary for the expansion growth of our business. We regularly review the many internal opportunities which we have to utilize that cash both from a geographic and product line perspective. Our priorities for the use of excess cash remain the same, namely: organic growth and expansion needs of assets; acquisitions in the petroleum additives space; dividends and stock repurchases. That concludes my planned remarks. And Kevin, can we open the lines for any questions, please?

[Operator Instructions] Our first question today is coming from Dmitry Silversteyn from Longbow Research.

My question is going to be pretty straightforward. The petroleum additives business had about a 1% growth in volumes versus a fairly easy comp a year ago. As we get into the second half of the year, are you looking for the similar sort of low single-digit growth rate? And can you talk a little about the pricing dynamics for the second half of the year, expectations as far as your ability to hold prices here or maybe have to give up a little bit of pricing, and how that's going to jive with what we've seen at least in the announcements? And that we haven't seen negatives on the market but there's been a recent announcement of a price increase in base oil whether that's a concern for you going forward.

Yes, sure, we will, Dmitry. As we said in our remarks, we've been a little bit surprised that we haven't seen some of the economic activity pick up that might be associated with some more demand for our products. We're very confident of our product offering and we are confident with what we're doing with our customers. And the demand, we still believe this is a very low-growth industry and have expectations that things are going to pick up. But whether they do or not, we'll see. Of course, pricing, Teddy, you want to comment on that?

Yes. Again, on pricing and margins and costs in general, we don't see any changes to the fundamentals of the business today and we were pleased with the margins in the first half and in the last -- the trailing 4 quarters. And we don't expect any changes in the near future.

It's fair to say that most of the decline that you've seen outside of volume growth was driven mainly by foreign exchange more so than pricing or mix?

Foreign exchange was about $4 million and price was about $5 million. But this is -- you can get mix in that number fairly easily, so, there's no takeaway from those numbers.

Okay. And then finally, I know that it's the installed car park is the most important driver of sort of the use of lubricants, as well as miles driven and so on, but in emerging region like Asia and particularly China where the car park is relatively small compared to the annual production rate, and with annual production rates possibly declining a little bit in the second half of the year given high dealer inventories of finished cars, are you seeing anything from the market in Asia that would lead you to believe that the growth there may slow down? Or are you still feeling fairly positive about your opportunities in Asia?

We're still feeling good about the opportunities in Asia. Certainly, we've seen some slowdown in China but overall, I think our view is that the Asian market is going to continue to outpace the rest of the world and grow certainly as it impacts our business.

Okay. And then on the M&A said, obviously one of those things you keep talking about is trying to broaden your portfolio both in terms of products and in terms of geographies in the additives segment. I understand that you're always looking at deals but is there anything that you'd like to talk about in terms of opportunities out there, whether the market is getting more or less amenable from the seller point of view as far as multiples are concerned, is the environment improving or is it pretty much the same as it's been?

I appreciate you asking it that way because we wouldn't be able to talk about any current activity. But in terms of changes in the dynamics, I don't see it improving right now. It's still a tough market to try to be acquiring other businesses in.

[Operator Instructions] Our next question is coming from Edward Yang from Oppenheimer. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Was customer mix, was that a headwind in the second quarter? There was a slight change in the 10-Q language in the first quarter. Price and mix were mentioned as being headwinds, this quarter was just price.

Yes, that change there -- that's a good catch, by the way, because we think we developed a little better way to calculate that to separate it out, so there's no message in there. As simple as that. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: And I can't take credit for that, someone e-mailed me that question, so someone else is smarter than I am. And did you see any -- you added some capacity in Singapore, I think on the detergent side. Have you heard of any other competitor capacity increases either in Asia or other parts of the world?

Yes. The capacity you're referencing of ours is due online in 2015. So we haven't added any detergent capacity in Singapore, that will -- we expect to come on 2015. As far as competitors' actions, there has been some capacity added but the additions in the announcements and the ones that we know about come in, in the next couple of years are all consistent with the small growth in the industry. And it's consistent with keeping up with demand so we don't expect any significant change in the supply-demand mix or balance as a result of these additions and announcements. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Okay, that's helpful. And regarding use of cash, you talked a little bit about M&A. What about your dividend policy? I mean, you've more than doubled your dividend in the last 3 years but still have a lot of room on in terms of a payout ratio.

Right. We are -- we're constantly evaluating all uses of cash. David mentioned that we have more than 200 million left on our stock repurchase authorization. And we were in the market a little bit last quarter. And it's my desire or at least our thinking that we will use that authorization before it expires at the end of 2014. So we expect to divide some stock over the next 6 quarters. As far as dividends go, we're also evaluating the dividend policy where we spent a fair amount of time on an ongoing basis talking about it. We have raised our payout somewhat over the last couple of years but raising it further is a possibility. We haven't made any decisions, but certainly raising it beyond its current level is being considered.

Our next question today is coming from Todd Vencil from Sterne Agee. L. Todd Vencil - Sterne Agee & Leach Inc., Research Division: I appreciate the commentary on the growth outlook and the fact that you've been a little surprised that the economic activity hasn't driven a little more -- little bigger growth in sales. If we look sort of longer term, I think you guys had talked about low single-digit global demand growth coupled with maybe a little market share, pick up to drive kind of mid single-digit growth for you guys, is that still a reasonable thing to think about?

Yes, it is, is what I believe, we don't think any of these near-term items that we're seeing today affect that longer-term view.

Our next question comes from Carson Mills [ph] from Yells [ph] Capital.

The previous caller asked a question about supply coming on, and I was just hoping you could help us better quantify. You said you feel good about the balance but can you kind of quantify what you guys see as coming on particularly with the new Lubrizol facility in China? That'd be great.

I'm sorry, I really don't have any details that would provide you with any accuracy on that. Generally, what I know is the same that you can read in the industry trade information.

Okay, you don't have spies out in the field, ferreting out that kind of stuff?

Well, sure we do. But I think the industry -- the information you read in the trade is pretty good.

And your next question today is coming from Kevin Hocevar from Northcoast Research.

I was wondering if you could comment on the big uptick in the R&D expense. It has been growing at about low double digits year-over-year growth for several quarters now. Now this growth was closer to 30% year-over-year. So just wondering if there's anything -- should we expect that type of acceleration in R&D to continue? Or was it kind of some onetime spending that was just in this quarter? How should we think about that?

Our R&D spend is not smooth and so it can vary from quarter-to-quarter, especially a high quarter this year versus the low one last. But the way you should think about it is that we are spending considerably more in R&D in this year than last. And the last few years, we've seen quite an acceleration in R&D. There's a lot of change going on in our industry in terms of new demands being placed on vehicles, on the lubricant needs for the motors, the transmissions, the gearboxes. And certainly, a lot of activity in the fuel economy improvement angle and emissions reduction angle as it relates to our fuel additives and lube additives. So our activity in support of our customers' needs from an R&D standpoint is picking up. Is it a 30% increase? No. But I think if you look at our spend in the first half in R&D, that's about what you can expect for the second half.

Okay. Very helpful. And another quick question. In your commentary, you mentioned the expectation for petroleum additives operating profit in 2013 to exceed last year's results. This year, down slightly year-to-date, just a little bit. So I'm just wondering if you're seeing anything maybe so far this quarter or out into the next -- the rest of the year that's -- caused you to think that this all pick up a bit in the back half of the year? Is it your comps or -- I wondered if you could help me understand this.

Yes. It's based on the fact that the folks in the field believe we will see some pickup in the second half, and we don't have that long a visibility with respect to an order book. And so it's not based on anything we have in hand now. So it's just really them being closer to the market and what they're hearing. And I'll guess we'll find out together how that turns out.

Okay. And then just finally, real quick on the Singapore facility is just real -- I believe, the groundbreaking is supposed to start sometime in the third quarter and it's supposed to come on like mid-2015, is that still the expectation?

Mid to second half of 2015, that's right.

[Operator Instructions] Since there are no further questions at this time. I'd like to turn the floor back over to management for any further or closing comments.

Well, thank you, and thanks to everyone for joining on the call today and we'll be talking to you next quarter. Have a good day.

Thank you.

Bye-bye.

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