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Edited Transcript of NEU earnings conference call or presentation 27-Apr-17 7:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 NewMarket Corp Earnings Call

Richmond May 12, 2017 (Thomson StreetEvents) -- Edited Transcript of NewMarket Corp earnings conference call or presentation Thursday, April 27, 2017 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian D. Paliotti

NewMarket Corporation - CFO and VP

* Thomas E. Gottwald

NewMarket Corporation - Chairman of the Board, CEO and President

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Conference Call Participants

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* Dmitry Silversteyn

Longbow Research LLC - Senior Research Analyst

* Kevin Bennett

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Presentation

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Operator [1]

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Greetings, and welcome to the NewMarket Corporation's First Quarter 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Brian Paliotti, Chief Financial Officer. Thank you. You may begin.

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

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Thank you, Audrey, 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 in 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 the non-GAAP financial measures to the comparable GAAP financial measure.

We filed our 10-Q this morning. It will contain significantly more details on the operations and performance of the company. Please take time to review it.

I will be referring to the data that was included in last night's release in the following. Net income was $64 million or $5.39 a share compared to net income of $62 million or $5.22 a share for the first quarter of last year. This is an earnings increase of 3% and an earnings per share increase of 3% from last year's performance.

Petroleum additives operating profit for the quarter was $99 million, which is $1 million or 1.3% lower than last year.

Consolidated sales for the quarter increased 6.5% to $543 million compared to sales for the same period last year of $510 million. The increase in revenue in petroleum additives in the quarterly comparison was driven mainly by higher volumes. Petroleum additive shipments for the first quarter of 2017 were up 13.9% from the same period last year.

Lubricant additive shipments increased across all regions, except North America, while fuel additive shipment increases were driven by North America and Europe, partially offset by decreases in Latin America

Of the $33 million increase in revenue, shipments was the predominant driver, partially offset by selling prices. Operating margins at 18.3% remained within our typical range.

The effective income tax rate for the first quarter of 2017 was 27.5%, down from a rate of 30.4% in the same period last year. The rate in the first quarter of 2017 was primarily lower due to an increase in earnings in foreign jurisdictions with lower tax rates.

On the cash flow for the quarter. Items of note include funding our dividends of $21 million and using more cash to fund the normal variations in working capital. We continue to operate with very low leverage, with net debt to EBITDA remaining below 1x.

In 2017, we expect to see an increase in the level of our capital expenditure to a higher level than 2016, which includes the anticipated spending on our Phase 2 Singapore investment as well as a number of improvements to our manufacturing and research and development infrastructure around the world.

In Q1 of 2017, we ramped up the capital spending to $46 million.

We announced also our intent to acquire Aditivos Mexicanos, or AMSA, which is a petroleum additives manufacturing sales and distribution company based in Mexico City. We still expect to close the transaction in the first half of 2017 pending a regulatory review in Mexico.

Over the past several years, we have made significant investments to expand our capabilities around the world. These investments have been in people, technology, technical centers and production capacity. And we intend to use those new capabilities, along with new investments mentioned, to improve our ability to deliver goods and services that our customers value and to grow shareholder value.

Audrey, that concludes our planned comments. We'd like to open up the lines for any questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Kevin Bennett with Davenport Asset Management.

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Kevin Bennett, [2]

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First one, Teddy, this is now the eighth straight quarter of year-over-year selling price declines. And I was just wondering if you could give some color on that and if that's kind of just the new normal or if you guys expect that to reverse at some point.

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Thomas E. Gottwald, NewMarket Corporation - Chairman of the Board, CEO and President [3]

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Happy to answer that. We don't talk a lot about pricing, but I do want to point out that we do get impacted by the relative price of crude oil, and oil's been down for some period. And while our costs and our prices don't track crude oil exactly, directionally they tend to move in the same direction. So if crude oil is down long enough, eventually it rolls through to our costs and our prices. So that's what you're seeing.

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Kevin Bennett, [4]

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Okay, that certainly makes sense. And then in terms of shipments, I guess it looks like we have 2 more quarters of benefit from the new -- what I assume is the benefit from new capacity in Singapore, the Phase 1, before we lap that. Am I -- first off, am I thinking about that right? And then secondly, I don't know if you guys can kind of give us what shipments would have been without that new capacity, if it's kind of the typical. I know you talk about 1% to 2% industry growth and you guys exceeding that a little bit.

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Thomas E. Gottwald, NewMarket Corporation - Chairman of the Board, CEO and President [5]

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Yes. We didn't see any shipment increase as a direct result of opening the Singapore plant.

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Kevin Bennett, [6]

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So what's -- can you then, I guess, talk about what's driving the 13.9% increase in volume shipped? I don't think we've seen a number like that in a really long time.

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Thomas E. Gottwald, NewMarket Corporation - Chairman of the Board, CEO and President [7]

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Yes. And it's certainly not indicative of the industry volume. I just wouldn't read too much into any 1 quarter or even 2 quarters back to back in this case. We talk about the industry growth rate at 1% to 2%, and our plan's to exceed that growth by a few percentage points. And when we look at the last 12 months rolling, that's about where we are.

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Kevin Bennett, [8]

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Okay, cool. And then one more. I guess moving to the margins in petroleum additives, a pretty steep drop year-over-year. I know -- I guess, thinking of full year '16, that 18.9% was a record. But what's the likelihood you guys can continue to expand on that number? Or should we expect some kind of a little bit of a pullback this year on the petroleum additives operating line? I'm not talking about the next quarter. I'm just thinking more longer term and for the year.

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Thomas E. Gottwald, NewMarket Corporation - Chairman of the Board, CEO and President [9]

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Yes. We talked about a range in the high teens in terms of percent. And that's where we are, and that's where we expect to be. We just can't be any more specific than that.

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Kevin Bennett, [10]

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Fair enough. And then last one from me quickly on the AMSA acquisition. I'm sure -- I probably missed it in some filing, but can you guys just remind me what their, I guess, annual sales are?

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

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Yes. In -- you didn't miss it in the filing. We haven't discussed or disclosed anything around the specifics on the financials around the AMSA business.

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Kevin Bennett, [12]

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Are you guys going to do that, I guess, once it closes?

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

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The business will be integrated into our operation, and we don't plan to break it out separately as far as a financial segment or financial information.

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Kevin Bennett, [14]

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Okay. And then I guess last one. Can you just -- are their margins similar to where you guys' are?

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

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They're in the petroleum additives business, and we expect them to perform inside of our operation as the other operations that we have do.

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Operator [16]

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

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [17]

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A couple of questions to follow up perhaps on the first line of questioning but just a little bit differently. Companies in the finished loop space talk about sort of premium mix and kind of these 5W-20s and 10s and synthetics and semi-synthetics. If you had to think about your business that way, how much are your lube additives would you say are going into these kind of the premium growing portions of the lube market versus perhaps older technologies, the 10W-40 oils, the stuff that's still fairly widely spread in emerging markets and places outside of North America?

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Thomas E. Gottwald, NewMarket Corporation - Chairman of the Board, CEO and President [18]

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Dmitry, I don't have a specific answer for you on that because I just don't know that data. But I'll tell you, I -- we participate in the full range of the market in the developed as well as developing parts of the world. So we're in all of it.

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [19]

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I would imagine that being 1 of the top 4 players in your industry. I was just wondering if there was a way for us to think about -- well, maybe that'll -- maybe my second question will help out with that. You mentioned that part of your -- or a significant part of the lube additives growth you saw was in Asia Pacific and Latin America and areas outside of North America. Was there a decremental margin impact from the growth of those technologies or additives going into those markets? Or is your margin really irrelevant in the products you're supplying?

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Brian D. Paliotti, NewMarket Corporation - CFO and VP [20]

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Dmitry, if you look at new car sales across the world and the technology in those new cars, the technology from an additive perspective is the same, whether it -- the car sold in North America or it's sold in a different part of the world, in Asia. So from that perspective, there's no discernible difference.

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [21]

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Okay, fair enough. The tax rate you put out, the 27.5% is a little bit lower than kind of the high 20s, 29% or so you guys had been averaging. Is that the right tax rate for us to think about for the year? Do you have any guidance for the full tax expectations for the year?

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Brian D. Paliotti, NewMarket Corporation - CFO and VP [22]

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I would say that you would take a look at last year's full year tax rate is probably a good indication. Again, don't read anything into 1 quarter, and that's probably equivalent to what we think it is going forward.

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [23]

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Okay. So around 29% or so, I think, you did last year.

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Brian D. Paliotti, NewMarket Corporation - CFO and VP [24]

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Yes, we did 29.1%.

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [25]

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Okay. Your share price -- or your share count there, I'm sorry, has gone up obviously with the share price. You don't -- it doesn't look like you've done any share repurchases, looking at your 10-Q. Are there -- do you have like a share repurchase plan in place? Or is it opportunistic? Is it some kind of a regular program? How should we think about the growth in fully diluted share count?

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Thomas E. Gottwald, NewMarket Corporation - Chairman of the Board, CEO and President [26]

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We have an authorization that's good through the end of next year. I guess you should think of it, if there's a choice between opportunistic and regular, it would be characterized as opportunistic. We make the decision based on the relative prices of the stock and other uses of cash at the time.

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [27]

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Okay, Teddy, that's helpful. Two more questions if you don't mind. In your -- if I look at sort of the revenue growth versus profit growth in your additives business, it looks like you guys got a 60% contribution margin on the revenue. Your revenues were up a little bit over $40 million, and your operating profit was up about $25 million. How did you do that?

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Thomas E. Gottwald, NewMarket Corporation - Chairman of the Board, CEO and President [28]

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Sorry, what period are you looking at?

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [29]

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I'm looking at the first quarter -- so I'm looking at the first quarter sequentially versus the fourth quarter basically. I'm looking at sequential movements in revenues here. If you look at the first quarter versus fourth quarter, you're up about $41 million. But if you look in the profit line, you're up about $25 million.

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Brian D. Paliotti, NewMarket Corporation - CFO and VP [30]

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Yes. Dmitry, I can send you that explanation off-line.

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [31]

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Okay. And then final question. As the first caller asked, your pricing has been down for an extended period of time, and I understand why. But the lube additive -- the finished lube guys are talking about seeing price increases not just in base oil but also in additives. So does that mean that your pricing actually sequentially is starting to move up? It just hasn't sort of lapped the declines, but at some point this year, we're going to start seeing pricing up year-over-year?

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Brian D. Paliotti, NewMarket Corporation - CFO and VP [32]

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Yes.

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [33]

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Okay, fair enough. Any idea when this year?

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Brian D. Paliotti, NewMarket Corporation - CFO and VP [34]

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This calendar year.

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Operator [35]

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That does conclude our question-and-answer session. At this time, I'll turn it back to Mr. Brian Paliotti for closing comments.

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Brian D. Paliotti, NewMarket Corporation - CFO and VP [36]

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All right. Thank you, everyone, for calling in. We'll talk to you next quarter.

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Thomas E. Gottwald, NewMarket Corporation - Chairman of the Board, CEO and President [37]

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Take care.

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Operator [38]

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This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.