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New Market Corp. (NYSE:NEU)

Q1 2008 Earnings Call

April 25, 2008 10:00 am ET

Executives

David Fiorenza - Vice President Treasurer and Principle Financial Officer

Teddy Gottwald - Chief Executive Officer

Analysts

[Irwin Marquees] - KeyBanc Capital Markets

Ian Zaffino - Oppenheimer & Company

Don Cobin with Kennedy Capital

Matthew Lawson - KBP Investment Advisors

Operator

And welcome to the New Market Corporation 2008 Financial Results Conference Call. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. David Fiorenza Vice president Treasurer and Principle Financial Officer for NewMarket Corporation.

David Fiorenza – Vice President Treasurer and Principle Financial Officer

Good morning. Thank you for joining me to discuss our first quarter performance. With me today is Teddy Gottwald, our CEO. I have a few plain comments after which we will open the lines for your question.

As a reminder, some of the comments we will make today our forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995.

We believe we base our statements on reasonable expectations and assumptions within the balance 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 of factors that are difficult to predict beyond our control. A full discussion of these factors can be found in our 10-K 2007.

As you saw an earnings release on Wednesday we had an excellent quarter and good start to the year. Income from continuing operations was $19.8 million or $1.27 a share compared to $ 14 million or a $0.80 a share for the first quarter last year. This quarter results included a gain of $ 3.2million resulting from a legal settlement relating to raw material. This $3.2 million is included in the Petroleum additive segment result which I will discuss more in minute.

Last year we exhibit the TEL business outside of North America and classify that Performa operation is discontinued business. There is no affect from that business in our first quarter result this year although it may 2.2 million in the first quarter of 2007. Total income for last year first quarter was 16.2 million or $0.93 per share.

Turing to our segment performance. Petroleum additive net sales in the first quarter were 380.6 million up $74 million or about 24% from 307million in the first quarter of last year. Shipments were up about 18% which accounts for the majority of the increase. The increase in the shipments was across all product line but predominately in the lubricant category section. The other component of the increase includes price changes, customer mix and a favorable impact of foreign currency translated into US dollar. Our sales benefit when US dollar is weak.

Petroleum additives operating profit improve to 37.7 million from 29 million when comparing the two first quarter period. The improved profit is reflected primarily in lubricant additive with some offset in fuel. The 2008 first quarter includes the gain of 3.2 million from the legal settlement that I just mentioned. Excluding this onetime gain, petroleum additives profit increase 5.5 million in the quarterly comparison.

Our operating profit margin for this quarter was 9.1% if you exclude the one time gain. The higher operating profit resulted from several factor; total shipments were approximately 18% higher which contributed significantly to the increase. As an off set however, we continue to experience challenges with our key raw material. There was a significant compression of operating margins due to the increased cost of raw material. The cost of crude oil continues to reflected high, while at the same time the supply of several of our other key row materials is tight and cost increases. It is a common event to receive multiple notices of cost increase during a quarter. Wherein the market place implementing price increases to attempt to recover those increasing cost. This chase of row material is likely to continue for the near term and put pressure on our margins until the cost are fully recovered. Our profits also include the favorable benefit of a weaker dollar.

Both selling, general, administrative and R&D expense were up when comparing the first two quarter period. They increased about 10% as we continue to invest to develop and to deliver the goods and services our customers need.

In the first quarter of '08 we are going to report our real estate development activity in segment operating profit. Because of the current immateriality of the real estate development segment its results are going to go in the all other category. The real estate development segment represents the Foundry Park 1 activity which is constructing an office building in MeadWestvaco. The project is well along its way, the building is now above ground and we are on schedule and on budget. The building phase in the project will last until late 2009.

For 2008 and most of 2009 we will be capitalizing the majority of the cost of the project and the financing expenses. The all other category also includes the result of our TEL sales in North America and certain manufacturing services performed by our subsidiary of our corporation. The result for the first quarter includes a normal operation and an increase in a provision for future cleanup obligations at an old site.

Interest and financing expenses for both first quarter `08 and `07 was $3 million. While we did borrow under our revolving facility during the first quarter of `08, average debt and average interest rates remain substantially unchanged, we did in the quarter without any borrowing on our credit facility.

Looking at cash flows. Our cash at the end of the quarter was 48 million which was a decrease of 24 million since December 31st. The primary use of cash included in increase of 39 million in certain working capital requirement. This included higher accounts receivables and inventory, as well as lower accrued expenses offset by an increase in accounts payable. The increase in accounts receivables inventories and payable reflect the growth of the petroleum additive operations, as well as higher product cost and timing of sales org.

We use 5.5 million to fund capital expenditures to support our business. We estimate our total capital spending during 2009 excluding the capital expenditures for Foundry Park to be 35 to $40 million.

During the quarter we also funded capital expenditures of 4.7 million for Foundry Park, all of those funds were borrowed. We expect capital expenditures in `08 related to the construction of the office building to be approximately 60 million with 6 million of that coming from our cash and the remainder being borrowed. And finally, we use 6.8 million to repurchase 125,000 shares of our common stock and funding 3.2 million in cash dividend.

Except for Foundry Park 1 construction line, our debt position is essentially unchanged since the end of the year. We have total long-term debt of a 163 million at December 31st.

Turning to the outlook. We achieved excellent performance during the first part of this year. These results were in an environment marked by continuing record high levels in crude oil cost. This plain changes in crude oil eventually reflected in the cost of many of our raw material. We have experienced rapid escalation of our cost during the first four month ‘08 and there is not none when these increases will in. We have bid in the market implementing price increases as maintaining our operating margins is a high priority of our business team. This environment held us in a ketchup mode with respect to our margin. We understand this dynamic and are managing it to the best of our ability. We run our business for the long run and do not get overly concern with quarterly fluctuation as long as we know that business fundamentals are unchanged. The first quarter included excellent performance in volume sold and we have not experienced any major negative impact from the economic slowdown in the United State. Our business is worldwide in nature and a weaker dollar generally has a favorable impact on our profitability. Our focus remains on delivering the goods and services our customers need to be successful in their market place. This requires continually increased spending and research and development as well as de-bottlenecking programs to provide the needed capacity. We continue to expect that 2008 petroleum additives operating profit will exceed the excellent results they posted last year.

As we have communicated in the past we intend to leverage our financial strength to increase shareholder value by growing the business with acquisitions being an area of preferred interest to use our cash.

Our primary focus in the acquisition area remains in the petroleum additives industry. It is our view that this industry will provide the greatest opportunity for a good return on our investment while minimizing risk. We remain focused on this strategy and we will evaluate any future opportunities. Nonetheless, we are patient in this pursuit and intended to make the right acquisition for our company when the opportunity arises.

It is also policy not to comment on any particular company or specific opportunity. We believe we have many internal opportunities for growth in the near term both from geographical and product line extension. Until an acquisition materializes we will build our cash and our balance sheet and we will continue to evaluate all alternate uses of that cash.

Yesterday our board declared the quarterly dividend in the amount of $0.20 a share which will be payable on July 1st to shareholders of record to close the business on June 13th. We will be filing our 10-Q next week and I encourage you to read that. While that’s the end of my presentation. I'll now open the lines for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from [Irwin Marquees] with KeyBanc Capital Markets. Please proceed with your question.

Irwin Marquees

Hi guys how are you doing?

David Fiorenza

Hi.

Irwin Marquees

Hey, could you give me a breakdown on the volume price in currency for your revenues there of 24%. What was the FX?

David Fiorenza

Rounded numbers if we are up 24%, 18 or so percent from shipment, 3% from FX and 3% from price mix.

Irwin Marquees

Price match. Great. The raw materials base oil - look like we even though crude is being flying but base oil is been fairly flat through out the quarter. How much is that up for you guys year-over-year?

David Fiorenza

We've seen a lot of base oil increases. If we look at the first quarter this year compared to the last quarter of last year our purchasing guys are seeing high single digit increases across the board.

Irwin Marquees

Okay.

David Fiorenza

I don't have an exact answer for you on base oil specifically.

Irwin Marquees

Got you. Couple more questions. The next question was - a real quick one. Was the law suit is there probably more color on that, is there any regard to…

David Fiorenza

It was just an old suit where we thought we had some pricing issues and we got a settlement from it. But there is nothing, no story there.

Irwin Marquees

Great. And then have you – its sounds like you have been putting crude price increases, and what's the range of those price increases and where you able to any prices increases back in the December area, January when they take affect?

David Fiorenza

We started our discussions early in the first quarter. They kick in across the board but not a major kick-in the first quarter.

Irwin Marquees

Okay.

David Fiorenza

And the percent is different at every customer. So there's really no – there's no one number I have to get in.

Irwin Marquees

Great and then you guys said that you feel like your – your trying a little bit catch-up. Is that in regards to the market other competitors in the market putting through price increases ahead of you guys? Or is the fact that the escalation of the raw materials are going so fast that is more of a catch up?

David Fiorenza

The latter. It's just moving so quickly, every time we raise prices we find out they have gone up again.

Irwin Marquees

Got you. And one last question is, you guys are taking, with your volumes being up, you are taking some market share from some of your other competitors. What do you think is the catalyst to that?

David Fiorenza

I'm note sure you can conclude that from our data. First quarter last year was a weaker quarter than normal and that we even were puzzled on why it was so weak. This quarter is a nice long quarter. If you look at this quarter's shipments compared to the third and fourth quarters of last year, you don't see this big percentage jump like you do in this little time slice that we're comparing right now. So, yeah we did pick up some business last year but….

Irwin Marquees

Got you.

David Fiorenza

I think it’s just the timing that we're looking at.

Irwin Marquees

Alright. Also, are you guys going to be with the stock -- well, it's been flying this past quarter but it's come down a little bit. Will you still be buying back stock this quarter?

David Fiorenza

We have a 10 million authorization left and we tell you when we were finished. We don't ever tell you we are in the market.

Irwin Marquees

Great. Thanks a lot guys. Good luck.

David Fiorenza

Thank you.

Operator

Our next question comes from Ian Zaffino from Oppenheimer & Company. Please proceed with your question?

Ian Zaffino

Thank you very much. Two questions here. First one would be building on the last question about playing the catch-up. How much do you need to raise prices to offset your raw materials cost right now to keep your margins the way you are, to reach your targeted margin?

David Fiorenza

I don't have a number for you. I can tell you that, we have told you and others that 10% plus margins you saw in the second and third quarter of last year were representative of our current business. We still believe that. We tend to raise prices to get back to that kind of range. But it changes everyday and so…

Ian Zaffino

Okay.

David Fiorenza

For us to keeping on that will keep raising prices if we can.

Ian Zaffino

Okay. Because the way I look at it is if you are seeing high single digit increases in your raw materials your pricing needs to go up more than, I guess, the 3% you reported this past quarter. Did I get that right?

David Fiorenza

That's correct.

Ian Zaffino

Okay. And second question would be is what do you view your debt capacity at right now and what type of leverage ratio are you actually targeting if you are to do something on the M&A side?

Teddy Gottwald

We don't have a specific target for the debt ratio. The closer the business is to what we do, the more aggressive we would be in the leverage side. If we can make acquisitions in the petroleum additives area if it is business that we know, then there is likely to be a fair amount of synergy and so the risk associated with that would be lower than reaching out further. So we will be comfortable with it pretty high debt ratio. I would like to see it above where it is right now. I don't think that we are utilizing our capital fully when it is beyond in the one time or less range where it is today.

Ian Zaffino

And do you have a targeting EBITDA leverage ratio?

Teddy Gottwald

No.

Ian Zaffino

Let me list the matching in our profit business.

David Fiorenza

It is a tough question to answer. I think on an ongoing basis we can certainly support something in the 2 to 2.5 range but if it is acquisition it provides a lot of synergy. Our experience has been that we've been able to get synergy fairly quickly and like deals. So we would be very aggressive levering up if it looked like that would be a short-term factor.

Ian Zaffino

And what opportunities you see talking about where ever you acquire the synergies?

David Fiorenza

Now it is in is in duplicate activity if we were to. There is a number of niche players in some of the more speciality area, if we were to add one of those you’re probably looking at duplicate sales force and duplicate back office activity, I think a lot of duplication.

Ian Zaffino

Okay, alright. Thank you very much to let the next question go on. Thank you.

David Fiorenza

You are welcome.

Operator

(Operator Instruction). Our next question comes from Don Cobin with Kennedy Capital. Please proceed with your question.

Don Cobin

Good morning guys. David, you mentioned that you have, I think, you said many internal opportunities of growth. Can you guys expand on that a little bit?

Teddy Gottwald

Yeah, this is Teddy, I will expand a bit on that. Our strategy over the last several years has been to expand geographically. Historically our market share in North America and Western Europe has been higher than in some of the other region. So geographic expansion has been a big part of our strategy and we continue to do so, and product line expansion also has played a role and we will continue to play a role. We have expanded our product lines in the industrial lubricant additive area. We have expanded in the drive line area as well with some new product, a lot of it in the off road category, and that’s where we see the greatest opportunity for and continuing to broaden our product line and penetrate into Asia Pacific, Eastern Europe and Latin America.

Don Cobin

And do you feel you have the capacity currently to expand into those markets or do you need to invest more to get there?

David Fiorenza

Our volume growth ambition is pretty modest, that’s because we don’t see great opportunity to be aggressive on the volume side or see a benefit from that kind of market disrupting. But the other side of the equation is the declining out of its capacity and we are quite limited today. We have been de-bottlenecking our plan and we will continue to de-bottleneck and we spend money to do that. But you should think of our volume whereas ambition has been pretty small, low single digit.

Don Cobin

Okay. We will heard about the potential sales of your competitor herein, you talk us then about whether you would be a potential acquirer, and I understand that’s not something that you should be addressing on a public firm here. But what about turning the around the other way, and if the valuation application, does that purchase that to go through, show that your stock is significant to move the value, is that strategic review on your part or how do you think about that?

Teddy Gottwald

We are pretty comfortable with our strategy, with our performance over the past few years, and we think we had a lot of momentum going forward. And….

David Fiorenza

Yeah. When I look at where we are, one the thing that gives me great comfort everyday is the continuity of our management team. Essentially the same team has been running the company for the last 10 year, we know each other, we have a higher level of trust with each other, and I think with the broader team that we just have a lot of opportunities to continue to grow and I am excited about that.

Don Cobin

Okay. Thanks guys.

Operator

Your next question comes from Saul Ludwig. Please proceed with the question.

Saul Ludwig

Hey good morning guys. I was like to tuning in I apologize if I repeat someone else's question. To what extent you have capacity outside the US, you have plans in Europe or Asia and to the extent that you want to expand more into the Asia or Latin America where you have lesser market share. Do you need to make investment there to be able to compete with the guys who have went there?

David Fiorenza

Well I think in the global business we've got.

Teddy Gottwald

And we do have capacity in Europe and in Latin America, we don’t have beyond the ground in Asia Pacific, but we manage our supply like we manage in rest of our business, and that’s on a global nature. We are excited on capacity and we are doing all we can to de-bottleneck because the industry overall would not forget, its not a growth industry, and the demand for finished lubricant is not something that is growing rapidly. The industry does not need a lot of Greenfield additional capacity.

Saul Ludwig

How are you able to shift 18% more volume in the first quarter and you actually grew your inventories from the end of December to the end of March that’s pretty remarkable?

David Fiorenza

But you have more capacity when you want out?

Teddy Gottwald

Saul it maybe a mix of a second. On a sequential basis we’re not seeing that kind of a growth.

Saul Ludwig

Your inventories from last year were up from a 180 to 206 million, So your inventories were up you know better than 10% and your volume was up – that suggest you produced more unit than you sold that’s why you grew your inventory. So that was the (Inaudible) do we get more capacity which you think you have?

David Fiorenza

Inventories are actually on a unit basis slightly down. You are seeing the fact that we evaluate obviously at current prices and we have enough capacity to satisfy our current demand , and that’s what you are seeing.

Saul Ludwig

How much was your unit raw material cost up first quarter to first quarter?

Teddy Gottwald

We believe it was in the 13 to 15 kind of range.

Saul Ludwig

13 to 15%, and you only have 3% more in price so that explains the market contest.

David Fiorenza

Well the 3% was on the -- I am comparing apples and orange basis. So unit basis with raw material went up to a fair amount first quarter.

Saul Ludwig

And price was up 3% first quarter to first quarter?

David Fiorenza

Right

Saul Ludwig

Okay. So I am with you there. And then, with this 18% increase in volume that you had, Teddy, was that due to just the timing of when you ship more of your traditional product or to what extent will that reflect something some success in this longer term strategy you talked about for product line expansions on new products, new opportunities geographically. Where they in the first quarter, are they think that are going to help you longer term?

David Fiorenza

I thank you really shouldn’t focusing too much on that 18%, that comparing first quarter to first quarter and first quarter of last year was.

Saul Ludwig

It was down 10%

David Fiorenza

With unusually like. We have first quarter to fourth quarter you are not looking at that same kind of growth, its more like 4%.

Saul Ludwig

Got you. So – are you starting to benefit yet from strategic initiatives that you announce before about the geographic expansion particularly outside of North America and Europe and product line expansion has been industrial product line of the road?

David Fiorenza

Absolutely and we been seeing that benefit last several years because this strategy has been in place for a while and that would explain most of our volume growth and success over the past two three years.

Saul Ludwig

And you have price increases and affects such that the second quarter prices are going to be higher than your first quarter prices?

David Fiorenza

Yeah.

Saul Ludwig

And what type of increase might be seen?

David Fiorenza

Now, when you ask the customer my customer would say, we are out there enough to recover raw materials. Raw materials keep moving so.

Saul Ludwig

And you are?

David Fiorenza

Predominantly we do have several – pretty good side around the world going on, predominantly.

Saul Ludwig

Well then the final question what's the mix between fuel and oil additives?

Teddy Gottwald

In the oil?

Saul Ludwig

Year sales, year sales that half fuel half oil or….

David Fiorenza

Let me tell you that market may be 85, 15 leave with a (inaudible) footprint.

Saul Ludwig

85 oil, 15 fuel?

David Fiorenza

Absolutely.

Saul Ludwig

Great, thank you very much.

David Fiorenza

You are welcome.

Operator

Our next question is from Matthew Lawson with KBP Investment Advisors. Please proceed with your question.

Mathew Larson

Yes, I was wondering if you could the restricted payment that’s available on a year compound?

David Fiorenza

I don’t have that with me, but I will be happy to follow up with on that one.

Mathew Larson

Alright, you can follow up on phone. Thank you.

David Fiorenza

Thank you.

Operator

There are no further questions in queue at this time. I would like to turn it back over to management for closing comments.

David Fiorenza

Well thanks everyone for joining and we will see you next quarter. Have a good day.

Operator

Ladies and gentlemen this does concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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