NewMarket Corp

NYSE:NEU

Earnings Call Transcript 2020-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the NewMarket Corporation Conference Call and Webcast to review second quarter 2020 financial results. All lines have been placed on a listen-only mode for the duration of today’s call.

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

[Brian Paliotti, Chief Financial Officer]

Thank you, Jess, and thanks, everyone, for joining me this afternoon. As a reminder, some of 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 contains significantly more detail 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 earnings release.

Net income was $22.3 million or $2.05 a share compared to net income of $74.2 million or $6.63 per share for the second quarter of last year. Petroleum additives net sales for the second quarter of 2020 were $408.7 million compared to $560.8 million for the same period in 2019.

Petroleum additives operating profit for the quarter was $33.1 million, lower than the second quarter operating profit of last year of $103 million. Overall, the story for the second quarter is simple: our shipments were significantly impacted by the COVID-19 pandemic.

With dramatically less miles driven and travel, and with less industrial production specifically with automobile plant closures, global demand for both lubricants and fuel additives declined substantially. Our sales volume was of an unprecedented 24% versus the same quarter last year and down 25% versus the first quarter of 2020.

Lower shipments drove lower sales revenue and lower profit. All of the financial and operational comparisons were muted by this impact. During our report to you on a very strong first quarter, we said we expected to see our operations to be impacted by the pandemic. Government restrictions to combat the spread of COVID-19 would lead to reduced movement of people, goods and services, which will reduce the demand for both fuel and lubricant additives. This is exactly what we saw in the second quarter.

The 24% reduction in demand was driven by decreases in all regions, with North America accounting for over half of the drop and our European region accounting for about another 30%. Latin America and Asia regions both saw smaller reductions.

A few other financial items of note for the quarter. The effective income tax rate for the second quarter of 2020 was 18%, down from the rate of 23.3% in the same period last year, because we generated more income from foreign sources in Q2 this year than we did in Q2 of 2019. During the quarter, we funded capital expenditures of $20 million, paid dividends of $20.8 million as we continue to operate with very low leverage with the net-debt-to-EBITDA ending the quarter at 1.5 times.

Now, on to some additional comments. We would like to first and foremost say and continue to say, thank you to our 2,000-and-plus team members who have adjusted to the life in the COVID-19 world for the past multiple months and who have made the necessary sustained changes so we are able to operate safely around the world. This has not been easy on anyone and our team is no exception.

Our primary focus besides keeping everyone safe continues to be meeting our customer needs through this crisis. As we have communicated last quarter, operations continue to run without interruption. We’ve worked with our customers to help them through this challenging business environment. And our R&D projects are moving forward, so we don’t lose time developing new products for their future needs.

Helping our customers through these uncertain times continues to be our focus. Our business continuity planning process has us well prepared to manage through these challenging times.

We began to see negative trends in mid-April as the number of miles driven dropped and many auto company suspended production. Also in April, gasoline consumption in the United States reached the lowest point it has been in over 50 years. And at one point in the month, miles driven in the United States reached a level that was about 50% lower than levels seen in the first quarter and miles driven in most areas of Western Europe reached levels that were about 80% to 90% lower than levels seen in the first quarter.

While all 3 months, we saw decreased shipments, our overall low point was in May. In June, we saw some improvement, particularly in North America. And in Asia Pacific region shipments were on par with June of 2019. We are seeing the petroleum additives market to improve as government restrictions on people’s movements are eased.

In the U.S., for example, gasoline demand has recovered to within 15% of pre-virus levels, up 50% from the reduction we saw in April. In Western European countries, personal miles traveled have returned to within 10% of pre-virus levels. Further improvement will depend heavily on the rate and extent to which restrictions are lifted and stay lifted.

Most OEMs have resumed manufacturing of vehicles, which is certainly a positive. And further improvement will also be driven by a resumption of overall world industrial activity. Modern transportation and machinery cannot function without our products. And this unprecedented reduction of activity will not last.

Knowing this, we are continuing to manage for the long term. We remain committed to our research and development investments to support our customers’ future needs with new products and services. We are continuing to invest in capital improvements to increase reliability, quality and flexibility. And most of all, we remain committed to our people who will continue to position us well for long-term success.

We are well positioned to manage through these uncertain times and an experienced management team and have a very sound financial position. We’ll continue to have an increasingly clear view on the impact next quarter. And we’ll report what we’re seeing in Q3 at our next investor call after the Q3 results are published.

We thank you for joining us for the call today. We hope you’re all healthy and staying safe. Jeff, that concludes our planned comments. We are available for questions via e-mail or by phone. So please feel free to contact myself directly concerning questions.

Thank you all again, and we look forward to talking to you all next quarter. Stay safe out there.