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Edited Transcript of NEU earnings conference call or presentation 24-Oct-19 7:00pm GMT

Q3 2019 NewMarket Corp Earnings Call

Richmond Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of NewMarket Corp earnings conference call or presentation Thursday, October 24, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian D. Paliotti

NewMarket Corporation - VP & CFO

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Conference Call Participants

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* Dmitry Silversteyn

The Buckingham Research Group Incorporated - Director

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and thank you all for joining this NewMarket Corporation conference call and webcast to review third quarter 2019 financial results. (Operator Instructions)

And now for opening remarks and introductions, I'm pleased to turn the floor over to your host, Chief Financial Officer, Mr. Brian Paliotti. Please go ahead, sir.

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [2]

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Thank you, Jim, and thanks for joining us this afternoon. As a reminder, 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 in our SEC filings, including our most recent Form 10-K.

During this call, we may also discuss non-GAAP financial measure included in our earnings release. The earnings release, which can be found on our website, includes a reconciliation of the non-GAAP financial measure to the comparable GAAP financial measure.

We filed our 10-Q this morning. It contained significantly more details on the operations and performance of our company. Please take time to review it. I will be referring to the data that was included in last night's release.

Net income was $68 million or $6.06 a share compared to net income of $58 million or $5.12 a share for the third quarter of last year.

Sales for the petroleum additives segment for the third quarter of 2019 were $551 million compared to sales in the third quarter of 2018 of $561 million. This decrease was primarily due to lower shipments, partially offset by increased selling prices.

Petroleum additives operating profit for the third quarter of 2019 was $95 million compared to $76 million for the same period last year, and the increase was primarily due to lower raw materials and conversion costs, partially offset by lower shipments. We are pleased with the year-to-date cost-to-serve efforts undertaken by our team to operate more efficiently and better serve our customers. This is evidenced in the lower conversion costs as we gain experience operating a broader supply network with our newer Singapore and Mexico facilities. It is also showing in our lower selling, general and administrative costs this year.

Shipments decreased 1.6% between the periods mainly due to decreases in lubricant additive shipments, with Asia Pacific and Latin America being the primary drivers for the decrease. With each quarter this year, the volume gap has narrowed versus last year. Our shipments were off 12% in the first quarter and 8% in the second.

While some markets continue to be soft, we do see signs that the overall trends are started improving. We are encouraged by the strong operating profit results of our petroleum additives business in 2019 compared to last year, so we must acknowledge that our 2018 results were disappointing.

Our operations for the previous 2 years were adversely impacted by a challenging economic environment marked by multiple quarters of rising raw material costs and softening global demand. Petroleum additives operating market for the most recent rolling 4 quarters is 16.7%, which is back in the historical mid- to upper-teen range that we expect from our business. We'll continue to make margin improvement a priority until we see stability.

The effective income tax rate for the third quarter of 2019 was -- sorry, for the third quarter of 2019 was 22.4%, which is up from the rate of 14.4% for the same period last year. In 2018, we had a onetime impact in our rate for the third quarter related to the Tax Reform Act.

On the cash flow for the quarter, items of note include our funding of our normal dividends of $21 million and our capital spending for the quarter of $14 million, bringing the year-to-date capital spend to $37 million.

We continue to operate with very low leverage with net debt-to-EBITDA at 1.3x. For 2019, we do expect to see capital expenditures in the $60 million to $70 million range. With several major expansions behind us, our CapEx is focused on quality, safety and environmental improvements and our cost-to-serve efficiency gains.

We continue to make decisions to promote long-term value for our shareholders and customers, and we remain focused on our long-term objectives. We believe the fundamental of the industry as a whole remain unchanged, with the petroleum additives market growing at a 1% to 2% annual rate for the foreseeable future.

We continue to believe that we will exceed that growth rate over the long term and our team is very focused on generating profitable new business.

Jim, that concludes our remarks, and we'd like to open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to the line of Dmitry Silversteyn with Buckingham Research.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [2]

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Can you hear me?

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Operator [3]

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Yes, sir. Please go ahead.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [4]

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A couple of questions. First of all, on the -- if I'm kind of looking at the margin improvement year-over-year, you mentioned raw material and conversion costs. If you look at kind of price in raw material and the lower processing and conversion costs that you guys talked about, how would I spit that up in 2 buckets in terms of at least relative size of these drivers?

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [5]

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In a margin perspective, Dmitry, I'll have to give you the exact from a dollar perspective that would relate back to margin, so I can get that to you after the call, if that's okay. But from the perspective of what was the larger driver of the 2, raw materials was the larger driver versus conversion.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [6]

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Got you. Okay. Then if I kind of look at your 10-Q data and the difference between the performance in fuels and lubes, it looks like that the price mix in fuels was up like mid- to high single-digits in -- I'm sorry, fuels. Yes, in lubes, it was very different. It looks like to be flattish, may be up a little bit. So was it mostly price that you're still trying to push? Or was there kind of a mix shift in terms of within the product portfolio itself?

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [7]

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On the fuels and lubes side, it was more of a product mix shift versus price.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [8]

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Okay. So more of a mix than price, okay. If I -- you mentioned that raw materials was the bigger driver, if you look at year-over-year and quarter-on-quarter, how did your raw material basket fare in the third quarter versus third quarter of last year and versus second quarter of this year? And how do you see that shaping up for the fourth quarter?

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [9]

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In general terms, the raw material basket, we saw more stability from second quarter to third quarter this year, and we didn't see that in 2018 in the third quarter. And from a go-forward perspective, we don't give guidance on what raw materials are -- we think raw materials are going to do. But from a standpoint of what we saw in the 2 quarters in the third and second this year, we saw more stability than we did last year.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [10]

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Okay. So it sounds like sequentially pricing stable more or less, but on year-over-year it was down meaningfully. Is that a fair...

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [11]

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Meaningfully, from a raw material perspective, yes, we saw more stability this year than we saw the fluctuation in last year, that's correct.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [12]

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Okay. Have you guys looked at the IMO 2020 impact, the possible impact that can have on the lube and fuel industry? And do you have any kind of a view on what the implementation of low-sulfur fuels in marine diesel was going to do for your business? I'm not sure if you're even a major player in marine diesel, but I was just wondering for the industry overall if you kind of thought about what the impact would be?

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [13]

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We understand that there'll be an impact to the additives business. And the marine business is not a business that we participate heavily in today. And so from the perspective of the industry, there'll be an impact. And from our perspective, we don't see that much of an impact as we're not that heavily into that segment.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [14]

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What kind of an impact would you -- were you thinking about seeing or the industry was thinking about seeing?

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [15]

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Well, I mean, the industry is going to see an impact, I mean, like I said, we don't play in that market. So I can't comment on what the other players are going to see or what the impact is going to be on them.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [16]

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I guess, my question is, Brian, more in general, I mean, impact doesn't have to be negative. So I mean, is there going to be an opportunity to get more sophisticated lubes into the market or fuel additives or vice versa? I'm just trying to understand overall what the impact is going to be in the industry, positive or negative?

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [17]

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Dmitry, I guess, what I'm trying to articulate is that, the direct impact from what IMO was going to do on the market, we don't see a material impact to our business. I think that there will be an impact from the players that play in that segment that could have new products to go into that segment. But we would not have knowledge to what those would be and whether they'd positive or negative to that segment of the petroleum additives industry.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [18]

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Got you. Okay. You talked about various regions experiencing different sort of demand trends both in fuel and lube additives. If you look at your major regions, can you talk to sort of what the current environment is like and how it's different between regions? And what your outlook is for the balance of the year?

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [19]

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Yes, I would say what we've seen to this point from a region-to-region perspective is sorted, followed along with what you've seen from a macro perspective. So you've seen the North American market be a little bit more resilient to ups and downs from an economic perspective, more softness in Europe mainly driven by Germany, and then from a new car sales perspective in Asia, specifically China you're seeing softness. And we don't know what it's going to look like for the balance of this year, but that's what we've seen and that's been reflected in the comments that we've made from a regional perspective.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [20]

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Got you. And so you didn't mention Latin America, anything specific happened in Latin America that did not drive your volumes down this quarter? Or is it just -- is it macro? Is it with Argentina? Can you talk about...

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [21]

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No. Nothing specific, Dmitry. I mean, it's just softness. You continue to see softness just in the macro auto industry everywhere and some -- as you know, some of the regions are more impacted than others due to the demand.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [22]

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Got you. Got you. Last question. In terms of cash generation and the cash use, how should we think about your deploying cash? You already pretty underlevered. So I mean, I'm assuming debt paydown is not going to be a big use of cash. So is it going to be dividend increases, which you haven't done either? Or is it going to be mostly share repurchase?

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [23]

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Well, I can tell you that the use of the cash follow the 3 steps that we think about: one is giving the business everything that it needs in order to continue to grow from a CapEx perspective, and we commented on what the CapEx is going to look like; the second is dividend, and we did increase the dividend last quarter, so that is a potential use of cash; and then acquisitions is -- in the petroleum additives space is going to be another use of cash if we can find an opportunity. And then buybacks are always something from a shareholders' reward perspective that we potentially look at.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [24]

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Okay. So excluding the serendipity of acquisitions, it sounds like dividend increases and buybacks would be sort of 1, 2 and not much in terms of needing to pay down debt here?

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [25]

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Well, one is going to be given the CapEx for the business and then we will evaluate all the other uses of cash in that order of priority.

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Operator [26]

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(Operator Instructions) Mr. Paliotti, we have no signals from the phones. I'll turn it back to yourself and our leadership team for any additional or closing remarks.

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [27]

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Okay. Well, thanks, everyone, for calling in, and we'll talk to you next quarter.

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Operator [28]

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Ladies and gentlemen, this does conclude today's conference. And we thank you all for your participation. You may now disconnect your lines, and we hope that you enjoy the rest of your day.