Jan 31, 2014
Executives
David A. Fiorenza - Chief Financial Officer and Vice President Thomas E.
Gottwald - Chief Executive Officer, President, Director and Member of Executive Committee
Analysts
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division Ivan M.
Marcuse - KeyBanc Capital Markets Inc., Research Division Dmitry Silversteyn - Longbow Research LLC Edward H. Yang - Oppenheimer & Co.
Inc., Research Division
Operator
Greetings, and welcome to the NewMarket Corporation Fourth Quarter 2013 and Year End 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. David Fiorenza.
Thank you. Mr.
Fiorenza, you may now begin.
David A. Fiorenza
Thanks, Rob. Thanks, everyone for joining Teddy and me today to discuss our fourth quarter and year end performance.
As a reminder, some of the comments we will make today are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We believe we base our statements on reasonable expectations and assumptions within the bounds of what we know about our business and operations.
However, we offer no assurance that actual results will not differ materially from our expectations due to uncertainties and factors that are difficult to predict and beyond our control. A full discussion of those risk factors can be found in our 2012 10-K.
We intend to file our 10-K towards the end of February. It will contain significantly more details on the operations and performance of our company.
Please take time to review it. As it is very informative and represents the hard work of many of our finance team members.
I will be referring to the data that was included in last night's release. For the most part, I will focus on the performance of the fourth quarter.
All comparisons I mention will be the fourth quarter of '13 to the fourth quarter of '12, unless I indicate otherwise. We had an excellent fourth quarter, and as a matter of fact, it was a record fourth quarter.
Our net income was $54 million, which calculates to earnings per share of $4.08. These results reflect record operating profit by our performing -- our petroleum additive segment.
Net income for the fourth quarter of '12 was $53.1 million or $3.94 per share. As a result of the sale of the assets of Foundry Park, our Real Estate Development segment in 2013, we reclassified the results of operations in current and prior year periods to discontinued operations.
The effects on net income of these and other special items are presented in the summary of earnings table in the press release. Excluding the special items detailed on that schedule from all periods, earnings for this year's fourth quarter would have been $53 million or $4.01 a share, which is an increase of 15% compared to last year.
Petroleum additives' operating profit for the quarter was $80 million, an improvement of 12% over last year. Sales for the quarter increased 8% to $554 million compared to sales last year of $511 million, reflecting the benefit of 8% higher shipments.
Our petroleum additives business continues to deliver excellent results. The increase in revenue in petroleum additives in the quarterly comparison was almost entirely driven by increase in shipments.
Of the $42 million improvement in revenue, higher shipments accounted for $46 million with price mix in currency being somewhat negative. A couple of other items of note for the quarter were income taxes and cash generation and usage.
You will note that the effective tax rate for the quarter was 25.8%, which is historically low for our business. If you look at the yearly rate, it was 29%, which is more in line with what you should expect on an ongoing basis.
During the fourth quarter, when all the variables are known, we true it up for the year. During the first 3 quarters, we use estimates.
In other words, our annual number is a much more indicative of our overall tax burden than any one quarter. That being said, as we speak, Congress has not yet renewed the tax credit for R&D for 2014.
If Congress does not pass the credit, each quarter next year will have an additional tax, which represents the absence of that credit. We get about $3 million a year of R&D credits.
This seems to be a bit of a pattern though, where Congress eventually passes the credit, but often is late in the year and made retroactive to the beginning. On cash flow, items of note include, paying $14 million or so of taxes associated with the third quarter sale of the building I just mentioned, repurchasing $55 million of our stock, funding our dividends and capital expenditures.
We ended the year and the quarter with very low leverage with debt to EBITDA below 1. We purchased 169,800 shares in the fourth quarter at an average price of $323.21 a share.
I believe that covers the items of the fourth quarter that I wanted to cover. So, now I'll make a few comments on the year.
The statistics for the total year are detailed in the press release, so I will not read them. It was a very good year with the company posting record earnings in petroleum additives segment.
As a matter of fact, it posted its 10th consecutive record operating profit, 10th year. Petroleum additives shipments increased 4% for the year, which is within our long-term expert -- expectations of our performance in this market.
We continue to invest heavily in R&D and personnel to execute our business plan, and believe that plan is good for our customers and all of the other new market stakeholders. Our ability to continue to provide our customers with innovative solutions and products to meet their business needs is evidenced by the 16% increase in R&D in 2013.
That increased spending will continue in 2014. Capital expenditures grew by about 50% in 2013, in support of our growth efforts and to allow us to improve our service levels to our customers.
We're pleased to have received an investment grade rating from S&P during the quarter. We now have all 3 major credit agencies acknowledging the excellent performance of our business with this rating of our debt obligations.
Our business continues to generate strong cash flows, and this was supplemented in 2013 by the proceeds from the sale of assets of our Foundry Park Real Estate Development segment. From which, we netted about $126 million.
During '13, we paid dividends of $50 million, funded capital expenditures of $59 million, reduced our revolver debt by $75 million and repurchased $96 million of our stock at an average price of $293 a share. During the year, we posted a dividend increase in April from $0.75 a share to $0.90 a share, and then again in January, it was raised to $1.10 per share.
At the end of 2013, we have $154 million remaining on our stock authorization from our board, which expires at the end of 2014. For 2014, we expect to see an increase in capital expenditures to the $100 million to $120 million range.
This includes the anticipated spending on our new manufacturing facility in Singapore, as well as several improvements to our manufacturing and R&D infrastructure around the world. We expect capital expenditures to remain in a higher than normal range for each of the next several years in support of our business.
Phase 1 of the Singapore facility is expected to be completed in late 2015, with an investment in excess of $100 million. The significant capital spending for the project will begin around midyear this year, and continue through 2015.
The initial capacity will represent a modest increase in our overall global production, but will enable us to strengthen our business continuity capabilities and provide quick and effective service to our customers in Asia, India and the Middle East. The facility will be scalable to allow for growth as demand warrants.
We expect Phase 1 to be followed with more investments in new manufacturing units over the following years. We continue to have expectations that our petroleum additives segment will deliver solid results in 2014, after having posted record operating profit for each of the last 10 years.
I know I already mentioned that, but it's worth repeating my opinion. We mentioned that petroleum additives market shipment demand will continue to grow at an average annual rate of 1% to 2% over the next 5 years as there has been no significant change in the fundamentals for the demand of this business.
Over the long term, we plan to exceed that industry growth rate. 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. We intend to use these new capabilities, along with the new investments mentioned above, to improve our ability to deliver the goods and services that our customers value, and to expand our business and improve profits.
Our business continues to generate significant amounts of cash beyond what is necessary for the expansion in growth of our current offerings. We regularly review the many internal opportunities we have to utilize this cash, both from a geographic and product line perspective.
We continue our efforts in investigating potential acquisitions as both a use for this cash and to generate shareholder value. Our primary focus in the acquisition area remains in the petroleum additives industry.
It is our view that this industry will provide the greatest opportunity for a good return on our investment while minimizing risk. We remain focused on this strategy and will patiently evaluate any future opportunities.
We will continue to evaluate all our current use of that cash to enhance shareholder value, including stock repurchases and dividend. I believe that is the end of my planned comments, Rob, can we open up the line for some questions.
Operator
[Operator Instructions] Our first question comes from the line of Todd Vencil of Sterne Agee.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
It feels like the volume growth after being sort of a little lackluster in the first half picked up in the third quarter and then a little more in the fourth quarter. Can you talk about maybe whether it feels that way or whether this is just noise and what you're seeing there?
Thomas E. Gottwald
Sure, Todd. It's -- I think we've expressed in the past that it's pretty hard for us to read anything into a single quarter or even a couple of quarters in terms of a trend.
We just see balance in our quarters. We did mention that we think the industry volume outlook remains unchanged in the, I'll say, 2% range of growth a year.
The industry as a whole is coming off of a few weak years in the 2009, 2012, kind of timeframe. My gut feel is that industry growth is pretty solid right now and I'm encouraged by what I'm hearing about the worldwide marketplace.
There is weak spots, there is strong spots, but overall, I feel pretty good about where our market is right now, and our place in it.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
On the pricing front, are you guys looking at anything or can you see anything that's going to suggest a direction there over the next year or so? Or does everything look pretty much flattish?
David A. Fiorenza
Todd, as we discussed before, you should think of pricing as pass through, but last year was very, very benign on raw materials. And the only other thing on pricing is when we introduced new products into the marketplace, and then we deal with the pricing of their value to those.
But to answer your question directly, I would expect it to be pretty quiet for the next period of time.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
And then final one for me. You mentioned -- you gave us guidance on the cash -- on the CapEx for the year, I appreciate that.
And, you said, it's going to remain elevated. Should we expect it to be in that sort of triple digit millions range for the next couple of years?
Or is it not getting quite that high?
David A. Fiorenza
Yes, I think that would be -- you should think it will be in that $80 million to $100 million kind of range for the next several years, yes.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
So with -- maybe a little bit higher in '14?
David A. Fiorenza
'14 probably will be on the upper end of that range, yes.
Operator
Your next question is from the line of Ivan Marcuse of KeyBanc.
Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division
Real quick, raw material trends continue to, I think, you may have just talked about this, but raw material trends quarter-to-quarter, has been pretty stable, you've seen base oil will come down, so would you expect it to be a little bit of a tailwind in the first half of the year? Or how do you think about it?
David A. Fiorenza
When we look at our raw material experience last year, and I'll answer your question in a second. It was one of the quietest years I can remember on raw materials.
And yes, you're right, some things go down and other things go up. So in the fourth quarter, it was very quiet for us.
Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division
Great and then looking out because I know, but there has been some decreases in base oil over the announcements. Do you see that flow in through in the first half of the year?
Or is there other stuff that's going up that's going to offset that, so it should be -- for what you could tell right now are pretty -- remain pretty benign.
David A. Fiorenza
Yes, for all I can tell you is our planning base and our best view is, it will be very quiet again in '15 -- in '14.
Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division
And I understand that R&D spend, and you guys spend money to make money, would you expect that spend of the sort of in the mid-teens to at least remain -- at least for a full year -- that trend to remain over '14, '15? Or do you think that spending comes in or there's a couple of things that needed to be done this year, that maybe not -- maybe does not have to be done next year?
David A. Fiorenza
Are you asking about the rate of increase?
Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division
Yes. So you spent 16% more dollars?
Thomas E. Gottwald
We anticipate spending more this year. But I wouldn't expect it to be the same kind of percent increase.
Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division
And then, there's-- there has been a lot of chatter about Europe, sort of stabilizing demands and increasing all that much, but have you seen sort of European -- if you go through your different regions, is European volumes getting a little bit more stable or improving from what you can tell, and is there -- and how is South America looking for -- in regards to you -- as I know that's been a fairly strong point -- strong region?
David A. Fiorenza
Yes, as you know, we now will be publishing that in the 10-K. And when you see that, you will see that Europe had a very good year.
In our numbers, Europe is -- Europe, Middle East, Asia, Africa about 8%, 9%, 10% kind of revenue improvements. Asia had another very good year.
North America was relatively flattish, which is what you expect. And then Latin America was down somewhat.
Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division
Why would you think -- why would Europe be -- have such a strong year there, because everyone else, chemical wise, it's maybe stable, but it's been generally down, so what do you think that was different for you versus maybe the industry overall?
David A. Fiorenza
In Latin America?
Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division
Europe.
David A. Fiorenza
Europe. I don't know, to answer that.
I have been in -- and by the way, I said India a minute ago, I meant Asia, when I was talking about the region. I thought the way round, I'm sorry.
I headed backwards again. I can't attribute to any one thing other than that region includes a pretty expansive geographic area.
Operator
Your next question is from the line of Dmitry Silversteyn with Longbow.
Dmitry Silversteyn - Longbow Research LLC
Couple of questions, if I may. First of all, in the fourth quarter results, the offsetting foreign exchange and pricing that was down a little bit and offsetting what looked to be very strong volumes, was it mostly foreign exchange or was it mostly price, can you give us an idea there and on the price?
Was it sort of mix or was it an outright price decline?
David A. Fiorenza
I'm looking for that. I think, each of them was about $2 million.
So they're both very, very small. And it is mix.
Dmitry Silversteyn - Longbow Research LLC
$2 million -- so it's mix, not so much price. Okay.
The expansion in Singapore and Asia, I know you've mentioned that it adds relatively little to your global supply or your global capacity, but as you know, there are other players in the region that are expanding their capacities in Asia as well, so as you sort of look at the areas -- at the products that you're bringing online and at the product groups that your competitors are bringing online, is there a concern that, that capacity in the region, at least temporarily, may be a little excessive or are you sort of playing in different enough sandboxes with these capacity expansions where you should not be stepping on each others' toes?
Thomas E. Gottwald
A couple of comments so on that. We really do price on value, and with all of the investments we've been making in technology, that will continue to be the case.
I'll point out though that just from an overall supply and demand standpoint in the industry, even with modest 1% to 2% industry growth, the industry does need new capacity, and we don't foresee any significant change in the supply and demand balance based on announced and existing new capacity.
Dmitry Silversteyn - Longbow Research LLC
You're spending a lot on R&D and justifiably so in this -- what I would [indiscernible] industry. Can you update us on sort of the productivity of R&D, however you keep track of it, I mean some people talk about vitality index or sales from recently launched products, is there a metric that you track your R&D productivity on and can you give us an idea of how that metric has changed over the last couple of years?
Thomas E. Gottwald
We use a number of metrics. One of the more common one is the percent of sales from new products, and I believe about half of our products sold in 2013 were developed in the last 5 years.
We're pleased with the productivity of our technology investment. We've expanded our technical capabilities around the world, with more capability in Asia, in particular, Japan and China, and I'm confident in our team to continue to be with -- to use the investment we make in them very wisely.
Dmitry Silversteyn - Longbow Research LLC
And then final question. Sort of trying to revisit the first question that was asked on the call, that the strength in volumes in the second half of the year, it's 2 quarters in a row that, that volumes have been pretty strong in the third and fourth quarter.
So I'm just wondering if that's a particular market that is doing well for you, whether it's passenger vehicles or stationary or non-passenger transportation, is it some share gains in your existing markets, sort of what -- how sustainable is this improvement that you've seen. Can you at least see it carry over to the first half of 2014?
Or maybe there's been some prebuying ahead of anticipated price increases, I'm not sure, I'm just trying to understand how an industry as you're saying, that's growing at 1% to 2%, and your long-term growth rate is at 4%, can deliver an 8% to 9% volume quarter and a 6% volume quarter, the quarter before?
Thomas E. Gottwald
I think you just answered your own question with the last comments. It's not an 8% growth industry.
And, we just -- to really dig into it, we'd have to go back and explain those quarters in 2012 versus the year before. We just see variation in the quarterly shipments, and there's a lot of reasons behind them and no one reason in particular to explain it.
I did say I'm feeling good about the health of our customers and the overall volume direction of the industry, but it's certainly not an 8% growth market nor are our aspirations to grow at that rate ad infinitum.
Dmitry Silversteyn - Longbow Research LLC
One more question, I apologize. You haven't done an acquisition since the Polartech in 2012, can you talk about your acquisition pipeline and your outlook for 2014?
Thomas E. Gottwald
Sure. The high level answer is, we have nothing new to report.
And, we will continue to stress patience. Digging beyond that, we have a lot of activity going on around identifying candidates in petroleum additives, and seeing which ones is the best fit and trying to develop some channels to get things going, but we have nothing new to report on the acquisition pipeline.
Operator
[Operator Instructions] Next question is from the line of Edward Yang from Oppenheimer.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
Maybe just start with David, some modeling questions. On the interest expense, is $4 million a quarter a good run rate.
I would've expected interest expense to have come down in the fourth quarter given your net debt position.
David A. Fiorenza
Yes, the fourth quarter is the kind of interest we have in 1 quarter, with no revolver drawn.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
Okay. But for 2014, first quarter of '14, would that be around $4 million as well?
David A. Fiorenza
Yes, whatever it was in the fourth quarter, 4, 1.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
And on the R&D side, Teddy, you mentioned, you're continuing to increase the spending there, do you look at that R&D bucket as a percentage of revenue or a year-over-year increase, and going forward, what would that be? Over the last 3 years, it's been going up, as a percentage of revenue, about 50 basis points a year?
Thomas E. Gottwald
Well, tough question to answer. We have a very thorough internal management process on R&D.
In terms of managing a portfolio of products, we have a very well established system for tracking the progress of the projects. We do look at macro factors like R&D as a percent of sales.
But it's more driven by our view on what it takes to serve our customers, and how are we going to achieve our long-term plans to grow and serve our customers with the modern products that they demand.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
So it's more of a bottoms up process in terms of how you formulate that budget?
Thomas E. Gottwald
That's right.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
Just one more modeling question. The tax rate, what will that be in 2014?
David A. Fiorenza
I'd use 30%.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
30%. And just final question on supply.
Well, Teddy, you mentioned that the industry does need new capacity. So what are current utilization rates?
And what do you think the percentage increase in overall industry capacity, I know it's very hard to measure, but by 2015, when your plant comes online, and Oronite's plant come online, what do you think overall industry capacity would've grown by related to where we are at the end of 2013.
Thomas E. Gottwald
I can answer that in very general terms. I don't have exact numbers.
And I can give you my view on what I think the answer is. As far as capacity utilization goes, it's really all over the map, and it's a difficult question to answer because at various times, certain components and parts of packages are tight, other times the bottleneck will shift.
Overall, I would think that the industry and we tend to run in the high 80s as a percent range, pushing 90% of capacity. But that's more of a guess than any sort of empirical answer.
And, when I think about new capacity coming on, I think, it's very consistent with the market growth -- that 2% kind of range.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
So 2% a year, around 4% by the end of 2015, when these plants come online. I guess 2% for this year and 2% for next year, but I guess more step wise?
Thomas E. Gottwald
Well, I would not hold me to those numbers. But I think, directionally, yes, the industry capacity is growing right along with the market growth.
Operator
Your next question is from the line of Pat Kelly [ph] with Northcoast Research.
Unknown Analyst
I just wanted to touch back on the strong volume growth in the quarter. I'm just curious, was there any one type -- one-time type of business in there that is not expected to repeat?
Thomas E. Gottwald
Nothing comes to mind.
Unknown Analyst
Okay. Great.
And just my last question was on. I know you elaborated on shipment volumes by geography for the quarter.
That was very helpful. But just curious, what's your overall sentiment and outlook for 2014 by region when you exclude North America?
David A. Fiorenza
As we've discussed in the past, the growth is going to be in Asia, Latin America, Middle East and India. I don't have a crystal ball on each one of those.
And when I was speaking earlier about those regions, by the way, I was referring to revenue, not volume.
Operator
Ladies and gentlemen, we've reached the end of our question and answer session. I'll turn the floor back to Mr.
Fiorenza for any closing comments.
David A. Fiorenza
Well, thanks, everyone for joining. And we'll talk to you next time.
Thomas E. Gottwald
Thank you.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.