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Edited Transcript of NEU earnings conference call or presentation 1-Aug-19 7:00pm GMT

Q2 2019 NewMarket Corp Earnings Call

Richmond Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of NewMarket Corp earnings conference call or presentation Thursday, August 1, 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

* Thomas E. Gottwald

NewMarket Corporation - Chairman, President & CEO

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Conference Call Participants

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* Dmitry Silversteyn

The Buckingham Research Group Incorporated - Director

* Haruki Toyama

Madison Investment Holdings, Inc - Director of U.S. Core Equities and Portfolio Manager

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the NewMarket Corporation conference call and webcast to review second quarter 2019 financial results. (Operator Instructions)

At this time, it's my pleasure to turn the floor over to Mr. Brian Paliotti. Sir, the floor is yours.

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

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Thank you, Tom, and thanks to everyone for joining us, again, this afternoon. With me today is Teddy Gottwald, our Chairman and CEO.

As a reminder, some of the statements made during the conference call today will 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 our SEC filings, including our most recent Form 10-K.

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

This morning, we filed our 10-Q and it contains significantly more details on the operations and performance of the company. Please take time to review it. And I'll be referring to the data that was included in last night's earnings release.

The net income was $74.2 million or $6.63 a share compared to net income of $52.9 million or $4.53 a share for the second quarter of last year.

Petroleum additive net sales for the second quarter were $560.8 million compared to $596.2 million for the same period in 2018. This decrease was mainly due to lower shipments, partially offset by increased selling prices.

Shipments were down 8.4% from the same period last year, mainly due to decreases in lubricant additive shipments in Europe and Latin America and fuel additive shipments in Europe, North America and Latin America.

Shipments have been lower in recent quarters due to decisions not to renew certain low-margin business as well as softening global demand for our petroleum additives products, although we have begun to see evidence that this trend is starting to reverse.

Petroleum additives operating profit for the quarter was $103 million compared to the second quarter operating profit last year of $71.5 million. The increase was due to changes in selling prices and lower raw materials and conversion costs, partially offset by lower shipments.

Petroleum additives operating profit for the rolling 4 quarters ended June 30, 2019, was 15.8%. We have begun to see some turnaround from the challenging economic environment we have faced over the past 2 years, which was marked by sustained increases in raw material prices and softening global demand. The rolling operating profit margin is the highest we've seen since 2017, and it has just reentered the low end of our historical range of the mid- to upper-teens. The effective income tax rate for the second quarter was 23.3%, down from the rate of 24% in the same period last year.

Onto cash flow for the quarter. Items of note include CapEx of $12.9 million, funding of our dividend of $19.6 million and using more cash to fund the normal variations in our working capital.

We continue to operate with very low leverage with net debt-to-EBITDA below 1.5x.

For 2019, we expect to see capital expenditures in the $60 million to $70 million range. This is slightly revised downward for 2019 due to the timing of some of our larger capital projects.

We have continued to manage our business to satisfy the customer needs, while generating solid operating profit, making decisions we believe will promote the greatest long-term value for our shareholders, customers and employees.

We continue to believe that the fundamentals in our industry as a whole remain unchanged, with the petroleum additives market growing at 1% to 2% annual rate for the foreseeable future. And we continue to believe that we will exceed the growth rate over the long term.

Tom, that concludes the planned comments. We'd like to open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have a question coming through from Dmitry Silversteyn with Buckingham Research.

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

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Wondering a couple of things. First of all, on the -- you mentioned in your press release that foreign exchange had a positive impact on your margins. Can you elaborate on that? And is it just a translation of where you manufacture versus where you sell? Or what was it about the foreign exchange that hurt your top line but helped your margins?

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [3]

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Yes. It's a translation impact, Dmitry. We won't go into ...

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

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Meaning that you produce in Singapore at local currency and you sell in the U.S. and you get higher dollars? Or how does it work?

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

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Those type of impacts across the balance of the manufacturing units on the revenue stream.

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

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Okay. Can you give us an idea of where your -- of how different your manufacturing footprint versus your sales footprint is, so it's easier for us to monitor this effect going forward?

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

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Well, Dmitry...

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

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In other words, you're producing 70% in the U.S., but selling 70% abroad or vice versa, that's the type of thing that I'm looking for?

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

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Yes. Dmitry, I'd have to give you that -- something more detailed off-line. I mean, we sell all over the world in all types of currencies and we manufacture and buy goods across the world in a multitude of currencies. So it's not a simple answer as we manufacture X percent in one region and collect X percent globally in another region...

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

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Okay. I'll reach out to you off-line then, Brian. On the high single-digit volume loss that you're experiencing in petroleum additives, you mentioned that it was a combination of the market slowing down, but also of you "firing" some customers that were low margin. If you had to sort of separate those 2 events, how would we bucket that high single-digit decline in volume?

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

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Well, I think as we talked about last quarter, there was an impact in the first half of '18 that we saw carry into the first half of '19. So when we talked about we divested a small business and there's also places that we no longer sell. So that was about 3% of the 8%, and then the rest of it was through the effective management of shedding some low-margin business and the rest was just market. So that's -- that makes up the entirety of the 8%.

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

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Okay. All right. Great. And then just trying to understand the -- what I would consider to be a surprising lift in margins. So you lost $30 million or so on the top line, yet your operating profit grew by $30 million, $10 million of that I think was pricing, if it completely fell through to the bottom line. So where did the other 20 -- to channel another analyst, how did you guys do that?

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

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Well, we also have seen reductions in raw materials, but it's not just the procurement of raw materials. As you know, we made an acquisition a few years ago for self-production of some of our own raw materials and we're seeing the benefit of that. Then we had talked about over the last few years, we will start to see that in that line as well as we continue to be diligent from a cost perspective and saw benefits from that from more effective and efficient operations. So both of those combined were the vast majority of that.

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

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Okay. Got it, Brian. So would you consider this 17%, 18% EBIT level sustainable for the remainder of the year, given that raw materials are probably going to get even -- year-over-year comp at least is going to get better by the end of the year even if the pricing kind of stays here, I'm assuming you're still getting pricing for your product. So is this the new sort of level that we've gotten to after 4 quarters of somewhat lower results?

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

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As you know, Dmitry, we don't give guidance, but we think this business over the long term operates in the mid- to high-teens.

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

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Okay. Let me ask the question differently. Was there anything in this quarter that would not be repeatable in terms of the drivers of margin in the second half of the year?

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

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The answer to that is no.

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Operator [18]

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(Operator Instructions) And we do have a question coming through from Haruki Toyama with Madison Investment.

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Haruki Toyama, Madison Investment Holdings, Inc - Director of U.S. Core Equities and Portfolio Manager [19]

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The explanation you gave on the decision not to renew certain low-margin business, that's a new explanation, although the volume declines have been going off for a couple of quarters. Is there something that really ticked up in the latest quarter? Or is it just something that you just didn't call out in previous quarters?

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Thomas E. Gottwald, NewMarket Corporation - Chairman, President & CEO [20]

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This is Teddy. We called it out this quarter just because we didn't want to indicate that it was all related to market changes, that's all.

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Haruki Toyama, Madison Investment Holdings, Inc - Director of U.S. Core Equities and Portfolio Manager [21]

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Okay. But then that is something that did impact your reported declines in previous quarters as well?

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Thomas E. Gottwald, NewMarket Corporation - Chairman, President & CEO [22]

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There is always give and take in the marketplace, so yes.

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Haruki Toyama, Madison Investment Holdings, Inc - Director of U.S. Core Equities and Portfolio Manager [23]

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Okay. And then on the pricing, you're starting to lapse some increases from a year ago. Should we expect then that the pricing will continue to increase at similar paces or start to really wind down over the next few quarters?

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

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We expect this business to operate in the mid- to high-teens from a margin perspective over the long term, and we're going to manage it to that.

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Operator [25]

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(Operator Instructions) And Mr. Paliotti, there are no further questions left in the queue at this time.

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Brian D. Paliotti, NewMarket Corporation - VP & CFO [26]

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All right. Thanks, Tom, and thanks everyone for calling in. We'll talk to you next quarter.

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Operator [27]

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Ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation. You may disconnect at this time.