NewMarket Corp. --

The New Ethyl

There's nothing like tough times to sharpen a business team.

That's how Thomas E. "Ted" Gottwald, chief executive officer of NewMarket Corp., described the company's moxie at its annual shareholders' meeting in April.

A few years ago, things were indeed tough for NewMarket, one of the Richmond area's most iconic companies. The company, which for decades was named Ethyl Corp., makes petroleum additives that are used in engines and fuels all over the world. Though those products are essential, the company's markets and performance were difficult enough in 2001 for the previous CEO, Bruce C. Gottwald, to stand before shareholders and bluntly proclaim it "a sorry year."

Shareholder meetings seem to have become gradually cheerier in the years since. Challenges still lie ahead, but NewMarket has made a turnaround from the days when the company seemed to be in a deep hole.

"The tight spot that we got into -- I was part of the decision-making that put us there," said Teddy Gottwald, 45, during an interview at the company's Colonial-style headquarters in downtown Richmond. When he succeeded his father as CEO in 2001, "I didn't feel I had anything to prove," he said. "But I felt I had a responsibility to our shareholders and employees to improve performance."

When Gottwald took the helm, changes in the petroleum industry had hit the company hard. Prices were falling and profit margins were narrowing. The additives industry had an overcapacity of production. The company's sales were dropping. And NewMarket was carrying nearly $350 million in debt, much of it the result of a stock buy-back program. (Its debt had exceeded $600 million in the late 1990s). By 2001, NewMarket's stock price had fallen into the low single digits, and the company had suspended its dividend and was cutting staff.

Today, NewMarket's results are on the upswing. Revenue surpassed $1 billion in 2005 for the first time since 1997 and has increased every year since 2002, when it was $656 million. Profit was $42 million in 2005, up from $9.9 million in 2002. The company has slashed its debt to less than $154 million and started to build up cash reserves for possible acquisitions. It reinstated its dividend at 12.5 cents per share in the first quarter. The company's shares closed at $43.09 Friday [June 9, 2006) on the New York Stock Exchange. In 2001, its stock was below $5 per share and for a while dropped below $1 per share.

Gottwald said the turnaround was the result of five years of hard work. He attributes it to an experienced business team further sharpened by the tough times. Its sales of engine oils have improved, and the company has built sales in other petroleum additives such as hydraulic and transmission fluids.

Yet, Gottwald also says, NewMarket's foundation was always solid. "I'm convinced we were never as bad off as some people thought we were," he said. "Our cash flow has been strong throughout this period."

The average consumer doesn't buy or see NewMarket's products directly, but they do have an impact on daily life. Automobile engines and other machinery need to be lubricated to function properly, and oil companies turn to manufacturers such as NewMarket for chemical additives that make those fluids work more effectively, reducing friction, heat and wear and tear on machinery.

Automobile manufacturers and oil companies also turn to additives companies for chemicals that improve the efficiency and cleanliness of fuel. NewMarket's products make it easier to start car engines, improve fuel efficiency and help reduce pollution. Demand for those products is often driven by government regulations.

NewMarket's competitors include Ohio-based Lubrizol Corp., the largest company in the industry; Infineum International Limited Co., a joint venture of ExxonMobil Chemical Co. and Shell Chemicals; and Chevron Oronite Co.

The company's improving performance has come through "a lot of little things that added up," said David Fiorenza, its vice president, treasurer and chief financial officer. Those include debt reduction and cuts in excess manufacturing capacity.

Industry conditions have also changed. "I suppose the dominant factor in our industry in the late '90s was the consolidation of oil companies," Gottwald said. "That put the power in the hands of some very large companies. We went through a good five years where prices for our products went down."

After a few years of cutbacks in production capacity and improving global demand, supply is more in line with demand in the additives industry.

"Some of the large companies that were 90 percent focused on price are now concerned about supply," Gottwald said.

The company also shifted its emphasis toward more high-value petroleum additive products such as transmission, gear and hydraulic fluids, rather than engine oils, a high-volume but low-margin part of its business, though engine oil sales have improved, too.

"Shifting R&D investment into more high-margin, high-growth areas was a key to our success," said C.S. Warren Huang, president of Afton Chemical Corp., the subsidiary that manages the company's core business in petroleum additives. Huang, a native of Taiwan and a 26-year veteran of the company, is part of the sharpened team on whom Gottwald relies.

Huang, who has held a number of jobs in the company, works out of the company's research and development center on Spring Street, where engineers and scientists develop and test new generations of chemical additives for customers.

It's an expensive process. The upper floors of the R&D center have the look of a biotech center, where scientists develop chemical additives and test their molecular properties.

On the lower floor, in a series of bays and windowed rooms, engineers and mechanics work with engines in various states of assembly. Several rooms hold engines that run for hours or days to test the effectiveness of certain additives in fuel or lubricants. The longest test runs an engine for 500 hours and uses about 11,000 gallons of fuel.

"Consumers can be sure that our products go through stringent testing," Huang said. About 50 percent of the company's product portfolio has been brought to market in the last three years.

Huang said the company has seen several trends in the past five years that have helped with its turnaround, one being a new organizational structure that helped make it more nimble. "Now, more decisions are made at the local level," he said.

In 2004, the company changed its corporate structure to a holding company, which executives said would make it easier to manage its product lines and seek acquisitions. It adopted the NewMarket name and changed its ticker symbol from EY to NEU. NewMarket became the parent company of two subsidiaries: Ethyl Corp., which manages the company's declining tetraethyl lead business, and Afton [Chemical Corp.], which manages its core business in petroleum additives.

Along with the new management structure, the company is putting more emphasis on international markets. In recent years it has opened small sales offices in China, India, Mexico, Venezuela and other countries. Historically, its sales have been focused in North America and Europe. Gottwald attributes the company's improving performance in part to a generally healthy global economy and rising demand for petroleum products in developing countries.

"We decided we needed to focus on the emerging markets where we were underrepresented," Huang said. "We really increased our sales forces in emerging markets, and as a result we have a better business there, and we are growing."

Even with the new name, the company held onto a symbol of its past. The NewMarket corporate logo includes the image of a whale, a reference to a 1962 event that made the company famous and enshrined it in local business lore. Ethyl Corp. was not always a Richmond company. It was created by General Motors Corp. and Standard Oil Corp. in 1923 to sell tetraethyl lead, an anti-knock fuel additive that allowed car engines to run more efficiently.

The company came to Richmond because of Teddy Gottwald's grandfather, Floyd D. Gottwald Sr., who had risen from mail clerk to president of Albemarle Paper Manufacturing Co. In 1962, Albemarle acquired Ethyl Corp. in a $200 million leveraged buyout that the financial press dubbed "Jonah swallows the whale." Hence the whale in the NewMarket logo.

Over the years, Ethyl Corp. grew and sprouted a number of other businesses, including the specialty chemicals manufacturer Albemarle Corp., the plastics and aluminum extrusions maker Tredegar Corp., and the insurance company First Colony Corp. Ethyl Corp.'s old bread-and-butter product, tetraethyl lead, has been in a long-term decline since leaded gasoline went out of favor in the 1970s. It is now used only in niche markets in the United States, Canada and Europe, and it is being phased-out around the world. The tetraethyl lead business will continue to erode, and the company is managing that decline and drawing as much cash out of the business as possible.

NewMarket still faces other challenges. In petroleum additives, a $7 billion industry, NewMarket is the smallest of four major players that control 80 percent of the market. Petroleum additives remains a slow-growth market, at about 1 percent a year. Profit margins are still tight, though improving, and rising oil and raw materials prices continue to squeeze NewMarket and its competitors.

Considering the market situation, NewMarket's next step may be to buy a smaller competitor, or perhaps even a larger one. NewMarket's improving financial situation will make that easier. Gottwald says the company is looking for potential acquisitions, but he stresses that patience is the key.

"I don't expect to have any news for you anytime soon," he told shareholders at the annual meeting. In the meantime, "we're going to continue to work hard, and do our best to keep the momentum going."

-- November 16, 2006

This article was published originally in the June 12, 2006, edition of the Richmond Times-Dispatch. It is republished here with permission.