NewMarket (NEU) Q3 2019 Earnings Call Transcript

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NewMarket (NEU 1.77%)
Q3 2019 Earnings Call
Oct 24, 2019, 3:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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 am pleased to turn the floor over to your host, chief financial officer, Mr. Brian Paliotti. Please go ahead, sir.

Brian Paliotti -- Chief Financial Officer

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 have 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 two 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 margin for the most recent rolling four 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 22.4%, which is up from the rate of 14.4% for the same period last year. In 2018, we had a one-time impact in our rate for the third quarter related to the Tax Reform Act.On the cash flow for the quarter, items to 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 3 times. 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 fundamentals 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.

Questions & Answers:

Operator

Absolutely. Thank you. [Operator instructions] We'll go first to the line of Dmitry Silversteyn with Buckingham Research. Please go ahead.

Your line is open. Hello, Dmitry. Your line is open. Did you signal for a question?

Dmitry Silversteyn -- Buckingham Research -- Analyst

I did and I'm -- can you hear me?

Operator

Yes, sir. Please go ahead.

Dmitry Silversteyn -- Buckingham Research -- Analyst

All right. So good afternoon. Thank you for taking my call. A couple of questions.

First of all, on the -- if I'm kind of looking at the margin improvement year over year, you mentioned the 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 into buckets in terms of at least relative size of these drivers?

Brian Paliotti -- Chief Financial Officer

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

Dmitry Silversteyn -- Buckingham Research -- Analyst

Got you. OK. 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. Yeah, in lubes, it was very different.

It looks like to be flattish, maybe 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?

Brian Paliotti -- Chief Financial Officer

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

Dmitry Silversteyn -- Buckingham Research -- Analyst

OK. So more of a mix than price. OK. 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?

Brian Paliotti -- Chief Financial Officer

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 two quarters in the third and second this year, we saw more stability than we did last year.

Dmitry Silversteyn -- Buckingham Research -- Analyst

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

Brian Paliotti -- Chief Financial Officer

Meaningfully, from a raw-material perspective, yeah, we saw more stability this year than we saw the fluctuation of last year. That's correct.

Dmitry Silversteyn -- Buckingham Research -- Analyst

OK. 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-sulphur 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 could be.

Brian Paliotti -- Chief Financial Officer

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.

Dmitry Silversteyn -- Buckingham Research -- Analyst

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

Brian Paliotti -- Chief Financial Officer

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.

Dmitry Silversteyn -- Buckingham Research -- Analyst

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?

Brian Paliotti -- Chief Financial Officer

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'll 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.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Got you. OK. Thanks for clarifying that.

Brian Paliotti -- Chief Financial Officer

Sure.

Dmitry Silversteyn -- Buckingham Research -- Analyst

You talked about various regions experiencing different sort of demand trends both in fuel and lube additives.

Brian Paliotti -- Chief Financial Officer

Sure.

Dmitry Silversteyn -- Buckingham Research -- Analyst

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?

Brian Paliotti -- Chief Financial Officer

Yeah, I would say what we've seen to this point from a region-to-region perspective is sorted, follows 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.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Got you. So you didn't mention Latin America. Anything specific happened in Latin America to drive your volumes down this quarter? Or is it just -- is it macro? Is it Argentina? Can you talk about...

Brian Paliotti -- Chief Financial Officer

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.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Got you. Got you. Last question. In terms of cash generation and the cash use, how should we think about your deploying cash? You're already pretty under-levered.

So I mean, I'm assuming debt pay down is not going to be a big user 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?

Brian Paliotti -- Chief Financial Officer

Well, I can tell you that the use of the cash follow the three 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.

Dmitry Silversteyn -- Buckingham Research -- Analyst

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

Brian Paliotti -- Chief Financial Officer

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.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Right, right. OK. Got it. Thank you very much.

Brian Paliotti -- Chief Financial Officer

OK. Thank you.

Operator

Thank you for the question. [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.

Brian Paliotti -- Chief Financial Officer

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

Operator

[Operator signoff]

Duration: 14 minutes

Call participants:

Brian Paliotti -- Chief Financial Officer

Dmitry Silversteyn -- Buckingham Research -- Analyst

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