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NewMarket Corporation (NYSE:NEU)

Q4 2012 Earnings Call

January 29, 2013 11:00 am ET

Executives

David A. Fiorenza – Vice President, Chief Financial Officer and Treasurer

Thomas E. Gottwald – President and Chief Executive Officer

Analysts

Ivan M. Marcuse – KeyBanc Capital Markets

Kevin W. Hocevar – Northcoast Research Partners LLC

Todd Vencil – Sterne, Agee & Leach, Inc.

Dmitry Silversteyn – Longbow Research LLC

Max Salk – PPM America, Inc.

Operator

Greetings and welcome to the NewMarket Corporation Fourth Quarter 2012 and Year-end 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 David Fiorenza, Vice President, Treasurer and Principal Financial Officer for NewMarket Corporation. Thank you, Mr. Fiorenza, you may begin.

David A. Fiorenza

Good morning, Brenda, and thanks each of you for joining us to discuss our fourth quarter and year-end performance. With me today is our CEO, Teddy Gottwald. We need to have a few planned comments, and after that, we’ll be happy to take your questions.

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 based 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 these factors can be found in our 2011 10-K. We plan to file our 10-K for this year in the second half of February. I will be referring to the numbers that we included in last night’s release. NewMarket’s net income for 2012 increased to a record $239.6 million or $17.85 a share, compared to net income of $206.9 million or $15.09 a share for the previous year.

For the fourth quarter of this year, net income was $53.1 million or $3.94 a share, compared to net income of $33.7 million or $2.51 per share for the same period last year.

The earnings for 2012 and prior year periods include certain special items that are explained on the front page of the release. Excluding these special items from all periods, earnings for the year 2012 were a record $242.8 million or $18.08 per share, an increase of 25% compared to last year’s results of $193.7 million or $14.13 a share.

On this same basis, earnings for this year’s fourth quarter were $46.7 million or $3.47 a share, an improvement of 35% over last year’s fourth quarter results of $34.5 million or $2.57 a share. Earnings per share for the year and fourth quarter of this year increased 28% and 35% respectively. As we had mentioned a number of times, near-term demand variations in our business have become harder to predict. Having said that, the fourth quarter historically has been somewhat lighter quarter and this one is consistent with that pattern.

Petroleum additives net sales for the fourth quarter were $511 million, which is an increase of $12 million or approximately 2.5% higher than last year. The increase in sales was almost entirely due to increased volume, partially offset by unfavorable currency impacts, shipments were up about 4% in this quarterly comparison. Currency impacts for the quarter were in the $6 million adverse range.

Petroleum additives operating profit for the fourth quarter was $71.6 million, an improvement of 21% over the fourth quarter operating profit last year of $59.3 million. The profit improvement between these two fourth quarter periods was primarily driven by volume improvement, and the absence of some one-time costs we discussed last year, and those were offset to some degree by planned spending in S&A and R&D.

We are very pleased with this quarter’s results and the improvements over the last year’s fourth quarter. Petroleum additives net sales for the year of $2.2 billion were approximately 3.5% higher than last year. The increase between these two years reflect higher selling prices, offset partially by an unfavorable foreign exchange impact as well as 1.5% decrease in shipments for the year.

Petroleum additives operations had a record performance for the year in 2012, with operating profit of $372 million; an improvement of 20% over last year’s operating profit of $309.6 million excluding last year’s legal settlement gain. We posted an operating margin of 16.9% in this segment of the year.

This result was within our expectations of the performance of this business with the mix of business we sold last year. During the fourth quarter, we posted a 14% operating margin, which is also within our expectations of the normal business variations in the lighter quarter. Lower volumes do impact gross margins and because we do not adjust GS&A spend based on anticipated quarterly shipments, the volume impact is magnified in the operating margin.

We are pleased with both the quarterly and full-year results for the petroleum additives business. We did not repurchase any stock in the fourth quarter. We had approximately 13.4 million shares outstanding at the end of 2012. We have a current authorization $250 million for stock repurchases. This authorization expires at the end of 2014.

As we announced during the quarter, we sold $350 million of 10 year bonds at a coupon of 4.1%. We were pleased to receive an investment grade rating from Moody’s and Fitch recognizing our strong financial position, while the bonds will result in a higher interest cost versus 2012, this provides us with significant long-term capital at very attractive fixed rates. We are confident this will help us to achieve our business plans in the years to come, giving us flexibility and security to create shareholder value. We have good cash flow generation for the year with $393 million of EBITDA. The summary of our cash flows are also contained in the press release information.

Working capital for the year used about $14 million of cash and we have spent $39 million on capital expenditures. We paid $375 million of dividend this year, which includes the $25 per share special dividend in the fourth quarter, and have $39 million more cash in our balance sheet than we did at the beginning of the year. We did all of these items by only increasing our debt, $185 million for the year ending with the debt of $429 million and $89 million of cash.

We expect capital expenditures to be higher in 2013 than we’ve had in the recent past and expected to be in the $80 million to $100 million range. This increase supports our plans in Singapore as well as several improvements to our manufacturing infrastructure around the world, and additional spending and support of R&D activities. We expect CapEx to stay in the $80 million to $100 million range over the next three to five years in support of our worldwide business. We continue to operate with very low debt leverage. Our debt-to-EBITDA ratio at the end of the year was about 1.1.

I’d like to turn it over to Teddy for a few comments that he wants to make. Ted?

Thomas E. Gottwald

Thank you, David. As we begin 2013, we are confident that our customer focused approach to the market is the right path for us to continue down. We believe the fundamentals of how we run our business, a safety first culture, customer-focused solutions, technology-driven product offerings, world-class supply chain capabilities, and a regional organizational structure to better understand our customers’ needs will continue to pay dividends to all of our stakeholders.

We have plans and expectations that our petroleum additive segment will deliver improved results in 2013 versus 2012, on top of having posted record profits for each of the last few years, while we have been told that many finished lubricant in gasoline marketers saw a decline in their 2012 shipments of 5% or more, and we are adversely impacted by that market decline.

We expect petroleum additives industry demand to resume its growth at an average yearly rate of 1% to 2% over this next five-year period as there has been no significant change in the positive fundamentals of this business. Over the past several years, we have made significant investments to expand our capabilities around the world. These investments have been in people, technology, and technical centers, and production capacity.

We intend to use these new capabilities to improve our ability to deliver the goods and services with our customers’ value and to expand our business and profit. And we have plans to continue to expand these capabilities to provide even better service technology and customer solutions.

Over the past five years, our shipments have grown at a compounded annual rate of 2% including this past year’s downturn. As we look ahead at the next five years, we believe we are positioned to exceed the industry’s 1% to 2% volume growth rate by few percentage points.

As a reminder, we have a corporate goal of achieving at least 10% annual return to our shareholders averaged over any five-year period. We expect to be able to achieve this goal over the next five years. As the global company operating in many countries around the world, we are not immune to world economic conditions, Western Europe, and the Europe are significant factor in our business in financial results, as if the general economic activity around the globe.

Our planning assumption for 2013 is that we will operate in an environment of modest economic recovery around the world. Our business continues to generate significant amounts of cash beyond what is required for the expansion in growth of our current product line. We regularly review the many internal opportunities, which we have to utilize this cash, both from a geographical and product line point of view.

We continue our efforts in investigating potential acquisitions as both the years for this cash and to generate shareholder value. Our primary focus in the acquisition area remains on the petroleum additives industry. It is our view that this industry will provide the greatest opportunity for a good return on investment while minimizing risk. We’ve remain focused on this strategy, and we’ll evaluate any future opportunities, nonetheless, just as we have in the past, we want to stress that we are patient in this pursuit and intend to make the right acquisition when the opportunity arises. We will continue to evaluate all alternative uses of cash to enhance shareholder value, including stock repurchases and dividends.

David, turn I it back to you.

David A. Fiorenza

Thanks, Teddy. Brenda, we’d like to go ahead and open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Ivan Marcuse with KeyBanc Capital Markets. Please proceed with your question.

Ivan M. Marcuse – KeyBanc Capital Markets

Great, thanks for taking my questions. Real quick, what is the sales growth for the fourth quarter, you said, it’s actually down $6 million, was somewhat price mix flat on a year-over-year basis?

David A. Fiorenza

Yes, yes, because the two factors were volume and then FX as we mentioned.

Ivan M. Marcuse – KeyBanc Capital Markets

Okay.

David A. Fiorenza

The price mix is flat.

Ivan M. Marcuse – KeyBanc Capital Markets

And then on the raw material front, I know base has always been trending down, all the other products would seem really have been trending higher. So is that total basket on a sequential basis from third quarter to fourth quarter flat, and then what’s your expectations moving to at least the first half of 2013 for your raw material basket?

David A. Fiorenza

Good question, Ivan yeah, when we look at the fourth quarter compared to the third quarter, we see a flat long-term basket. When we look out into next year, we’ve seen some announced decreases in Group 2 and Group 3 type based stocks, and seen that much change in Group 1, we are seeing some increases in some of the other raw materials. So flattish to slightly up, this is my answer to your question about, what do we see in the first half of next year.

Ivan M. Marcuse – KeyBanc Capital Markets

Great. And then do you use more, I know the industry trying to at least for additives seems to skewing more towards Group 2 and 3, are you using less of Group 1 or how do I think about that trend going forward?

Thomas E. Gottwald

Ivan, this is Teddy. We’re following the same industry trend.

Ivan M. Marcuse – KeyBanc Capital Markets

Great. And you have all the competitors, there’s a lot of capacity in Group 2 and Group 3 coming online in the industry over the next year or two, couple of years. So how does that impact, how do you think that will impact you and the industry and is that a positive or sort of a net neutral?

David A. Fiorenza

Well, I guess you can look at it, anyway you want to I’d tend to look at it is a slightly positive. As more and more of these base stocks become available, our customers will look to us to formulate our products to, and they have been take advantage of that, which will give us an opportunity to show up our technology. So neutral to net positive, my answer to your question.

Ivan M. Marcuse – KeyBanc Capital Markets

Got you. And then the last question is just for the full-year, what is your cash from operations, the total amount?

David A. Fiorenza

I want to say, $270 something or other.

Ivan M. Marcuse – KeyBanc Capital Markets

Great, all right. Thank you.

Operator

Our next question comes from the line of Kevin Hocevar of Northcoast Research. Please proceed with your question.

Kevin W. Hocevar – Northcoast Research Partners LLC

Hi, good morning guys.

Thomas E. Gottwald

Good morning.

David A. Fiorenza

Good morning.

Kevin W. Hocevar – Northcoast Research Partners LLC

In terms of the margins that you guys got during the quarter, the gross margin seem to expand about 250 basis points on a year-over-year basis. So I’m just wondering we were pretty flat prices, pretty flat, I know you mentioned the pickup in volume improved utilization at the plant. So is that the entire reason for the margin expansion, is it the better utilization rates or were there any cost-cutting efforts as well?

David A. Fiorenza

Remind me what periods you’re asking this question about?

Kevin W. Hocevar – Northcoast Research Partners LLC

For the fourth quarter.

David A. Fiorenza

Yeah. On fourth quarter versus fourth quarter, you’re absolutely right, plus you may recall last year, we called out that we had a $4.5 million one-time charge for the contract position, we had taken. So if you take that out, then it’s exactly as you’re looking at.

Kevin W. Hocevar – Northcoast Research Partners LLC

Okay. And when we look at the shipments improved 4% in the fourth quarter, is there anywhere – is this a function of improving end-market demand or was it simply just, it was an easier comp and you’re not really seeing pickup anywhere, it was just an easier comp?

David A. Fiorenza

Yeah. That’s a really difficult question to answer, with a great certainty. But let me give a shot. The fourth quarter is typically, our lower quarter than the third quarter. And the pattern that we saw in the fourth quarter didn’t surprise us at all. On the other hand, last year’s fourth quarter was a little bit lower than you might expect, so ease your comp is probably the answer to your question.

Kevin W. Hocevar – Northcoast Research Partners LLC

Okay, and when we look in for, into 2013, I know you mentioned the expectation at this time, obviously that could change, but if Ross may tick-up a little bit. So as we look at the margins, you put up a very impressive margins this year, I think you said 16.9% in petroleum additives. Should we expect that, is that a maintainable or do you think that these will kind of go back to the 15%, 16% type margins, it’s kind of the long-term expectations for the segment?

David A. Fiorenza

Yeah. Good statement, 15% to 17% to us is the kind of margins on a longer term basis meaning not any one quarter in this selling, but we believe this business can deliver. So if we end it next year in that range, that would be within our expectations, and I also quite cut it much closer than that.

Kevin W. Hocevar – Northcoast Research Partners LLC

Okay. and then final question in terms of, you’ve been growing R&D spending about 10 plus percent, the last couple of years, so just wondering if you could elaborate on how the successes of that, is that one of the big drivers that we’ve seen in the improving overall margin. I just wonder if you could elaborate on how that’s been go on the increased spending?

David A. Fiorenza

Kevin, I’d say that yes, the increased spending is what’s driving our improvement. A lot of the increase spending has been focused on the international markets, the areas where we’ve traditionally had less presence, and I think that’s paying off, it’s helping us in traditional markets as well as to broaden our product lines. So we’re pleased with the progress, the increase spending is necessary in this market, because the demand is being placed on our customers’ product, continue to increase. So we expect to see another increase this year in R&D in support of our customers and an increase in R&D related capital spending also to expand our testing capabilities.

Kevin W. Hocevar – Northcoast Research Partners LLC

Okay. Thank you guys very much.

Thomas E. Gottwald

You’re welcome.

Operator

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

Todd Vencil – Sterne, Agee & Leach, Inc.

Good morning David and Teddy.

David A. Fiorenza

Good morning.

Thomas E. Gottwald

Good morning, Todd.

Todd Vencil – Sterne, Agee & Leach, Inc.

Seasonality going into the fourth quarter, I mean obviously you’ve said that that it’s usually a lower volume quarter, it seems this from what I’m looking at it, it has become somewhat more pronounced, am I right about that at least for the last four quarters in terms of seasonality being more pronounced, and do you think that’s a trend or is just happened to occur in the fourth quarter of the last two years?

Thomas E. Gottwald

Todd, if you go back and look at a broader range of history, you’ll see that the fourth quarter has tended to be maybe 5% lighter than the second and third quarters. We’ve mentioned in the last couple of years that quarterly predictions have become a whole life harder to make as the demand patterns have shifted. Last year’s fourth quarter was surprisingly low. this year’s fourth quarter was pretty much typical with other prior years, but we’re not ready to say that we can expect the normal shape of the quarters going forward.

Todd Vencil – Sterne, Agee & Leach, Inc.

Got it. I appreciate that historical color, Teddy. This is a net, but I’ll ask it anyway in the real estate business, it had a couple of $100,000 lesser profit this time than you’ve been running for quarters, is that anything there?

Thomas E. Gottwald

No Todd, that is not. if you go back and look at last year’s fourth quarter, you will see the same thing. It’s just the way it shakes out and the best thing to do on that counterpart business, as we look at the annual number and that’s why it’s going to be year-after-year.

Todd Vencil – Sterne, Agee & Leach, Inc.

Okay. That’s all I have. thanks guys.

Thomas E. Gottwald

You’re welcome.

David A. Fiorenza

Thank you.

Operator

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

Dmitry Silversteyn – Longbow Research LLC

Good morning, everybody, and thanks for taking my question. You’ve talked about that sort of the end of the year, seeing good volume growth there and you mentioned that you expect your business to a little bit better than the industry overall, talking about 1% to 2% longer-term. Last year, in the first-half, you’ve had sort of a mid-single digit decline in volumes in the first of the half year. so from what, I remember there wasn’t anything specific that to place there was just on some of the vagaries of the higher volatility that you keep referring to, but should we expect the first-half of the 2013 to be a fairly easy comp in terms of volumes?

Thomas E. Gottwald

Dmitry, when I look at the data in the first of this year. we have more business than we did this in the second half. so I’m not, I have think that the comps will be pretty tough.

David A. Fiorenza

Year-over-year, not at sequential first-half versus second-half?

Thomas E. Gottwald

Or the whole year versus the whole year?

David A. Fiorenza

If you look at the first half, maybe my numbers are wrong, but if I’m looking back at my model, you had sort of a mid-single digit decline in volumes in the first-half, which was offset by pretty strong pricing mix.

Thomas E. Gottwald

Right.

David A. Fiorenza

So I think in the first-half of this year, if you just get a normal market, you should have positive volume growth maybe, the magnitude that you saw in the fourth quarter thereabout, we can think about that there is going to be some volume challenges that are seasonal rather than sequential?

Thomas E. Gottwald

Again I can circle back to one of the comments I made. it’s really tough for us to cut it in the quarter to answer your question. The easier thing for us to communicate is, we have plans to beat that 2%, a couple points. so if you start with the annual number, I’m confident on that as far as how our quarter is going to shake out versus the other one, I just can’t help on that one.

Dmitry Silversteyn – Longbow Research LLC

Fair enough, I understand that. A question on pricing though, maybe it can be a little bit more helpful there. you had close of double-digit price increases or price mix currency in the first-half of 2012, currency should be a fairly mutual event of the way I look at it. are you seeing any pressure on pricing, given that, base oil that has come down, your customers are required to take a price card at least with DIY channel. Has there been pressure on your pricing and should we expect that to be detracted from the overall revenue growth through 2013 or at least in the first-half of it?

Thomas E. Gottwald

Dmitry, I think the fundamental to your statement is that we’re seeing raw materials decline, and that’s not our view. we expect raw materials to be fairly flat into the first-half of this year. And we don’t see any change to the industry fundamentals.

Dmitry Silversteyn – Longbow Research LLC

Okay. So as the raw materials flat on a year-over-year basis, implying that the declines we’re seeing sequentially are still reflected of higher year-over-year levels or are you saying that, I’m talking about base oil here or are you saying that the price increase that you’re still seeing from your other raw material suppliers including sort of the merchant additive guys out there that overall, your raw material basket is going to be flat.

Thomas E. Gottwald

That’s right. The overall basket is what we’re talking about being essentially flat.

Dmitry Silversteyn – Longbow Research LLC

Got it. But you’re not, I guess the reason I’m asking the question, Teddy, and I apologize for sort of being that hoarse maybe here, but typically, everybody sort of in this industry gets pricing as long as the guy in front of me can get pricing. and then it’s kind of works that way when prices are unwound, and we know that the oil blenders are giving up pricing in the retail channel in 2013, so they are becoming more vocal in asking for price cuts from you guys.

Thomas E. Gottwald

I just repeat sort of what I said that we don’t see any change in the fundamentals to the petroleum additives industry dynamics today, and we’re just not going to talk more specific about customer price actions.

Dmitry Silversteyn – Longbow Research LLC

Okay, fair enough. Can you talk a little bit about that the fourth quarter tax rate adjustment, was it just a sort of a normal end of the year catch up, and what’s your expectations for tax rates, yes for 2013?

Thomas E. Gottwald

Yeah. I can talk to that on the phase of the press release, you’ll see that we had a tax benefit associated with the special dividend. So if you take that out, you’ll see a more normal tax rate, I used 32% for a whole year, 31%, 32% for my planning base, and then our guys work hard to come in lower than that.

Dmitry Silversteyn – Longbow Research LLC

Got it. Okay that’s what I need to know. Thank you.

Thomas E. Gottwald

You’re welcome.

Operator

Our next question comes from the line of Max Salk of PPM America. Please proceed with your question.

Max Salk – PPM America, Inc.

Hi guys. Thanks for taking the question.

Thomas E. Gottwald

Good afternoon.

Max Salk – PPM America, Inc.

My first question was more kind of, I know you mentioned that you don’t want to see any major significant final change, but do you see any effect or do you foresee any effect of the extension of driveline oil interval changes impacting your shipments is like 1.5% decline in shipments this year is that coming from that kind of industry dynamic and all or can you add color to that?

Thomas E. Gottwald

I would tell you that any changes to service intervals is built into the view of 1% or 2% industry growth. So that is a factor that contributes to our view on the market growth.

Max Salk – PPM America, Inc.

Gotcha. Thank you. and then my last question was just again, a smaller. Are there any plans for more development Foundry Park was related to either CapEx project finance or balance sheet finance?

Thomas E. Gottwald

On the CapEx side, we have room at, on the Foundry Park area for one more Foundry Park one sized projects. we’re patient and working for the right partner there or tenant to work with, and there is nothing on the near-term horizon there, I don’t anticipate any action, any time soon on our additional project, but that can certainly change.

Max Salk – PPM America, Inc.

And you said, that will be funded with cash, not separate mortgage financing like that.

Thomas E. Gottwald

Most likely.

Max Salk – PPM America, Inc.

All right. Thank you very much.

Thomas E. Gottwald

Sure.

Operator

It seems there are no further questions at this time. I would like to turn the floor back over for closing comments.

David A. Fiorenza

Well, thanks to everyone for joining us, and I will talk to you next quarter. Have a good day.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. And thank you very much for your participation.

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