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NewMarket (NEU) Q1 2019 Earnings Call Transcript

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NewMarket (NYSE: NEU)
Q1 2019 Earnings Call
April 25, 2019 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for joining us for the NewMarket Corporation schedules conference call and webcast to review first-quarter 2019 financial results. [Operator instructions] Also as a reminder, today's meeting is being recorded. And now to get us started with opening remarks and introductions, I'm pleased to turn the floor to Mr. Brian Paliotti.

Welcome, Brian.

Brian Paliotti -- President and Chief Financial Officer

Thank you, Jim. And thanks 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 will be forward looking.

Relevant factors that cause actual results to differ materially from those forward-looking statements are contained in the earnings release, and our SEC filings including our most recent 10-K. During the call, we'll also discuss non-GAAP financial measures included in our earnings release. Their earnings release though 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 contains significantly more detailed on the operations and performance of our company.

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Please take time to read and review it. I'll be referring to the data that was included in last night's release. So net income was $62.2 million, or $5.57 a share, compared to $60.6 million, or $5.14 a share for the first quarter of last year. This is an earnings increase of 2.7%, and an EPS increase of 8.4% from last year's performance. On the petroleum.

Additives net sales for the first three months of 2019 were $532.7 million, compared to $586.9 million, for the same period in 2018, or a decrease of 9.2%. The sales decreased about $73 million, due to 12.5% decrease in shipments which contributed to a short term softening of demand of our products that we believe will turn around this year. We saw decreases in both lubricant and fuel additive shipments across all regions except for Asia Pacific, which had an increase in shipments of fuel additives. The decrease in shipments was partially offset by changes in our selling prices. Petroleum additives operating profit for the quarter was $87.9 million, or 4.4% higher than the first quarter profit for last year of $84.1 million.

The increase was due to changes in selling price and raw material, partially offset by lower shipments, foreign exchange, and higher conversion costs. The operating margin was 14.1% for the rolling four quarters including in the first-quarter of 2019. We've seen some improvement this year, but we're still seeing pressure on our margins due to the increase in the raw materials over the past two years, mainly because of the lag between when we raise our prices and where margins begin to improve and stabilize. Margin improvement will continue to be a priority in 2019 until we see margins consistently within our historical ranges. The effective income tax rate for the first-quarter of 2019 was 23% which was down from 25.5% for the same period of last year.

On the cash flow for the quarter, items that are not included on CapEx of $10.4 million, funding our dividends 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 our net debt-to-EBITDA remaining below two times. For 2019, we expect to see our capital expenditures in the $75 million to $85 million range consistent with our levels of 2018. Over the past several years, we made significant investments to expand our capabilities around the world.

These investments have been in people, technology, technical centers, and production capacities. And we intend to use these new capabilities to improve our ability to deliver the goods and services, our customers value, and grow shareholder value. Jim, that concludes our [Inaudible]. We'd like to open up the lines for questions, please. 

Questions and Answers:

Operator 

Thank you. [Operator instructions]. We'll go first to Dmitri Silverstein, Buckingham Research.

Dmitri SilverStein -- Buckingham Research -- Analyst

Good afternoon, guys. Thanks for taking my question. First of all--I know you guys don't like talking about what happened in the quarter, but you have two quarters now, six months where you have double-digit declines in volumes. In a market that's growing 1% to 2% and that's not known for this level of volatility.

What do you think is going on in the market assuming that this is not a new market specific phenomenon.

Teddy Gottwald -- Chairman and Chief Executive Officer

Dmitri, this is Teddy. As like you said, this is unusual in our our industry. And our industry demand really doesn't vary greatly year to year. So we do see this as a short-term issue, and we expect it to come around.

We've been in contact with customers all over the world to see if we can sense any kind of pattern to this. And we don't see a particular pattern or specific explanation. It's about a quarter of the softness that we can identify to the specific one-off issues. But other than that, it's just a general softness that the industry demand doesn't support over a long period of time.

Dmitri SilverStein -- Buckingham Research -- Analyst

So, other than this longer term recovery to the mean that will happen at some point in the future. Where does your confidence that we're going to see a reversal of this year comes from.

Teddy Gottwald -- Chairman and Chief Executive Officer

My confidence in it is in the fact that we haven't lost a significant amount of business, and the industry demand just doesn't vary plus or minus 10% we've seen here in the recent quarters.

Dmitri SilverStein -- Buckingham Research -- Analyst

I mean the last time we saw this type of a decline in volume. I mean you have to go back to the 2008, 2009 and a couple of bad quarters in there. When people were thinking the world was coming to an end, and everybody was trimming down their inventory about the channel. Is that is what's happening now maybe somewhat similar to that in a sense that this is not so much the markets slowing down by 10%.

But people are really cutting their inventories in a half in anticipation of just slower growth forward, or in anticipation of you guys in your competitors or your peers I should say. Lowering pricing with some raw material relief. It's like I said -- I understand that it's a combination of things. I'm just trying to say of how much of those things are one to two quarter long.

And how much of those things could be a year or two before they reverse.

Teddy Gottwald -- Chairman and Chief Executive Officer

Yes. I wish I had some some better insight for you, Dmitri. Most of those factors you mentioned are likely to be contributors. I wouldn't say trimming--our customers trimming inventories in anticipation of weak demand is is a concern, because that's just not how our industry works.

Our industry, our customers demand is not greatly dependent on small changes in the economic outlook. You refer to 2008, that was a major abrupt change Our customers and even consumers I think at that time took a big pause to see what was going to happen next. I don't really compare it to that. I think it's just multiple factors.

There's probably been some destocking in there but that can't last so long. And now we've seen base oil is moving up, raw materials moving up. There wouldn't be a destocking impact expected in that that scenario.

Dmitri SilverStein -- Buckingham Research -- Analyst

Again trying to understand the cadence of revenues. You provide a geographic breakdown by revenue, or revenue breakdown by geography I should say. Kind of jumped out at me that United States and China saw the mid-single digit, mid to high-single digit declines in revenues. But EMEA and other foreign saw low-teens decline in the revenue. Is there anything that we can take away from that as far as whether its the economic situation, or whether there's specific customer exposure that you can have in those regions that's accounting for this difference in rates of decline.

Brian Paliotti -- President and Chief Financial Officer

Dmitri this is Brian. The only thing that I would say i, as Teddy referenced that we can attribute 25% of what the change was from a shipments perspective to kind of identifiable one offs. And I can tell you that the regions that saw, the larger regions that saw the larger declines, that 25% is more attributable to those areas than the rest of the world.

Dmitri SilverStein -- Buckingham Research -- Analyst

Any granularity on those one offs for.

Brian Paliotti -- President and Chief Financial Officer

It's about 25% of the total change in shipments.

Dmitri SilverStein -- Buckingham Research -- Analyst

No. I've seen it. I mean what was it related to.

Brian Paliotti -- President and Chief Financial Officer

Well, one can be related to is that we divested a small business last year. So from a comparative perspective that is not in the comparative anymore. And then the other would be, there is some places in the world that we could sell product into last year. And in this year, we cannot.

Dmitri SilverStein -- Buckingham Research -- Analyst

OK. Fair enough. I'll jump back in and see if anybody asks questions then I'll go back in the queue. Thank you.

Operator

[Operator instructions] We'll take just a few moments to give everyone in the audience an opportunity to signal. And we do have just one signal in the queue, and it's a follow-up from Mr. Silverstein.

Dmitri SilverStein -- Buckingham Research -- Analyst

Thank you. Apparently, I'll just continue to ask questions then. On Asia Pacific you talked about fuel additives as the only real part on geography that that had a positive volume performance for you. Is it a matter of the economy growing faster in the regions where you're selling it or have you gotten some share or new product.

Why is that the outlier this quarter a positive outlier.

Brian Paliotti -- President and Chief Financial Officer

I think it's a little bit of a combination everything you just said Dmitri. From Asia Pacific perspective, we continue to see from a macro perspective not as much in China, obviously from a car sales perspective, but continuing to see transportation, and modes of transportation continue to increase which drives more fuel consumption.

Dmitri SilverStein -- Buckingham Research -- Analyst

Just looking back over the history that I have here with you guys. It doesn't seem to be that much seasonal, predictable seasonal margin behavior, first quarter to second quarter. But in most years that there was a decline in margins sequentially with raw materials doing what they're doing with your pricing. I'm assuming still layering in.

How should we think about margin progression sequentially.

Brian Paliotti -- President and Chief Financial Officer

From a margin perspective, Dmitri, I can just tell you that we've had continued effort to make sure that margin recovery is top in mind, and we're going to take the necessary actions to ensure that the margins get back to the range as a mid to high teens. The rolling still only at 14.1%, so we're gonna continue to work toward getting that range from a rolling perspective. So from a long-term perspective inside of the mid to high teens range.

Dmitri SilverStein -- Buckingham Research -- Analyst

OK. All right. So the fact that I couldn't observe any seasonality there probably means that there is not much seasonality there.

Brian Paliotti -- President and Chief Financial Officer

Yes, from a quarter to quarter, nothing discernible.

Dmitri SilverStein -- Buckingham Research -- Analyst

In your press release on the call you mentioned higher conversion costs. What do you mean by that. You talked about like getting shipments in and out, or packaging costs, or just manufacturing costs in general.

Brian Paliotti -- President and Chief Financial Officer

Just manufacturing costs in general.

Dmitri SilverStein -- Buckingham Research -- Analyst

And what's driving this higher conversion cost. Is it at the new plant in Singapore being brought online. Is it just normal first of the year increases in compensation, and insurance, and medical stuff.

Brian Paliotti -- President and Chief Financial Officer

It would be a combination of a multitude. It wouldn't be one driver but just in general, the cost of production across the network continues to increase.

Dmitri SilverStein -- Buckingham Research -- Analyst

Last question. Your tax rate decline through the year. Last year you were starting out at 24%, 25% ending up just in the low double-digits. How should we think about the tax rate for 2019?

Brian Paliotti -- President and Chief Financial Officer

The tax rate for 2019, we expect the tax rate to be in the twenty 23% to 24% range for full 2019, fairly equivalent to what we saw in the first quarter. 2018 and 2017 as you know there was a lot of moving parts with tax reform. So from a go forward perspective, I'd use the first-quarter rate as a pretty good rate for the balance of the year.

Dmitri SilverStein -- Buckingham Research -- Analyst

Thank you very much. That's all I have.

Brian Paliotti -- President and Chief Financial Officer

You're welcome. Thanks, Dmitri.

Operator

[Operator instructions] We'll pause for just another moment to give everyone a chance to signal. And gentlemen we have no signals from the group. I will turn it back to you for any additional or closing remarks.

Brian Paliotti -- President and Chief Financial Officer

Thank you everyone for calling in. And we'll talk to you next quarter. Thank you.

Duration: 16 minutes

Call Participants:

Brian Paliotti -- President and Chief Financial Officer

Dmitri SilverStein -- Buckingham Research -- Analyst

Teddy Gottwald -- Chairman and Chief Executive Officer

Teddy Gottwald -- Chairman and Chief Executive Officer

Brian Paliotti -- President and Chief Financial Officer

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