Q2 2019 Earnings Call

Please standby.

Good day, ladies and gentlemen, and welcome to the Newmarket Corporation Conference call and webcast to review second quarter 2019 financial results.

All lines have been placed in a listen only mode and there will be a question and answer session. After the presentation. If you should require assistance during the call. Please press star zero and an operator will assist you.

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

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, including 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.

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 nights earnings release.

On 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 of 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 four quarters ended June Thirtyth.

2019 was 15.8%.

We have begun to see some turnaround from the challenging economic environment, we have faced over the past two 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 is just react to 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.

On the cash flow for the quarter items are not included 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 offer operate with very low leverage with net debt to EBITDA below 1.5 times.

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

We have continued to manage our businesses have to satisfy the customer needs, while generating solid operating profit making decisions.

We believe we will promote the greatest long term value for our shareholders customers employees.

We continue to believe that the fundamentals in our industry as a whole remain unchanged with the petroleum additives market growing at a 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.

Thank you, Sir and ladies and gentlemen, if youd like to ask a question at this time. It is star one on your Touchtone telephone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again, ladies and gentlemen that star one on your Touchtone telephone at this time if you do have a question. Please hold while we poll.

Okay.

We do have a question coming through from Dimitri Silverstein with Buckingham research.

Hi, Good afternoon, guys. Thanks for taking my call.

Wondering a couple of things first of all on the.

You mentioned in your press release that sits out foreign exchange had a positive impact on your margins.

Can you elaborate on that.

Is that just the translation of where you manufacture versus where you saw or what did what was it about the foreign exchange that hurt your topline, but help your margins.

Yes, it's a translation impact Dimitri.

You mean, what you're putting some singapore at local currency as you saw in that Youre going to get higher dollars or how does that work those those type of impacts across the balance of the manufacturing units in the revenue streams.

Okay.

Can you give us an idea of where you are.

How different your manufacturing footprint versus your sales footprint. Those so it's easier for us to monitor the saw this effect going forward.

Well, let me turn the corner.

70% in the U.S, but selling 70% abroad or vice versa.

But thats the type of thing, but I'm looking for.

Yes, let me try I'd have to give you that something more detailed offline I mean, we sell all over the world and on all types of currencies, and we manufactured and buy goods across the world and multitude of currency. So it's not as simple as answer as we manufacture X percent in one region.

Collect X percent globally in another.

Region governance ill reach out to you offline them by thanks.

Hi 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 view.

Quote unquote firing some customers that were low margin, if you had to sort of separate those two.

You bet.

I would probably be bucket bad.

High single digit decline in volume.

Well I think as we talked about last quarter. There is that there was an impact in the first half of 18 that.

We saw carry into the first half a 19, so we talked about we divested a small business and Theres also places that we no longer sell so that was.

About three 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%.

Okay, all right great.

I'm just trying to understand.

But what I would consider to be surprising lifted margins. So you lost $30 million or so on the top line.

The operating profit grew by $30 million.

10 million of that I think was pricing if if a completely fall through to the bottom line.

So where did the other two.

Due to channel.

On other analysts how did you guys do that.

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.

And we have talked about over the last few years, where we'll 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.

Okay got it Brian So would you consider the does.

17, 18% EBIT level sustainable for the remainder of the year given the raw materials are probably.

We're going to get even.

The year over year comp at least we're going to get better by the end of the year, even if the pricing kind of stays here.

Your your I'm, assuming you're still getting pricing for your product. So is this is this the new sort of level that we've gotten so after four quarters of ill.

Somewhat lower results.

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

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.

The answer to that is no.

Okay alright, thank you.

Again, ladies and gentlemen that star one on your Touchtone telephone if you do have a question star one at this time please.

And we do have a question coming through from Haruki Toyama with Madison investment.

Hi, guys. 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 on for a couple of quarters is there something that really.

In the latest quarter or is it just something that you just call out in previous quarters.

Hi, this is teddy.

We are we called it out this quarter, just because we didn't want to indicate that it was it was all related to.

Market.

Changes that's all.

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

There's always give and take in to the marketplace.

So yes.

Okay.

And then on the pricing are you starting to lap some increases from a year ago should we expect and that the pricing will continue to.

Increased at similar.

He says there are start to really a wind down.

Over the next few quarters.

We expect this business to manage 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.

Thank you.

Thank you.

And ladies and gentlemen Star one star one at this time, if you do have a question.

[noise].

And just finally, there are no further questions left in the queue at this time.

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

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