Stepan Co (SCL) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2009 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, April 22, 2009.

I would now like to turn the conference over to Jim Hurlbutt. Please go ahead, sir.

Good afternoon, and thank you for joining us.

Before I begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including but not limited to, prospects for our foreign operations, global and regional economic conditions, and factors detailed in the Company's Securities and Exchange Commission filings.

Stepan's performance during the first quarter of 2009 was highlighted by our ability to successfully manage our core specialty chemicals business, and most importantly, bottom line profitability, all within a challenging global economic environment. Most notably we posted record first quarter net income, even after excluding the positive impact of deferred compensation. Net income excluding deferred compensation jumped 21% to 12 million during the quarter, versus 9.9 million in the year ago period.

This performance was supported by the relative stability of demand for our surfactants within the laundry and personal care markets, our largest product segment. Falling commodity prices, and a strict focus on expense controls, also contributed to the improvement. We also continued to strengthen our balance sheet, as we reduced Stepan's toll debt and total debt to capitalization ratio to under 38%.

Total net sales for the first quarter were 318 million, down 17% year-over-year, the decline in sales was primarily related to lower sales volume, which accounted for 13 percentage points of the sales decline, and lower foreign sales due to currency translation effect, which accounted for 7 percentage points of the sales decline. These factors were partially offset by higher selling prices, which accounted for three percentage points of sales growth.

Net income for the first quarter was 15.2 million, or $1.43 per diluted share, compared to net income of 8.7 million, or $0.85 per diluted share in the year ago quarter. As I previously mentioned, excluding deferred compensation, net income was 12 million versus 9.9 million last year. Net income performance benefited from declining commodity prices, and expense control throughout the Company. First quarter gross profit increased by 2.8 million, or 6% as compared to the year ago period despite a 13% decline in sales volume.

Operating expenses for the first quarter declined by 6.5 million, or 22% compared to the year ago period, primarily as a result of the 6.2 million decline in deferred compensation expense. The full effect of our deferred compensation plan on pretax income was 5.2 million of income, versus expense of 1.9 million in the year ago period. The accounting for the Company's deferred compensation plan results in income when the price of Stepan Company's stock or mutual funds held in in the price of the company fall and expense when they rise. The Company also recognized the changes in the value of the mutual funds as investment income or loss.

Let's move now to a review of the performance of our three business segments. First Surfactants, the largest segment of our business, accounting for 82% of total company-wide sales. First quarter net sales of surfactants totaled 260 million, a decline of 11% year-over-year. Lower sales of biodiesel and surfactants, which are used in such end use markets as institutional cleaning, housing products, and oil fields, accounted for the majority of the volume decline.

Total surfactant sales volume declined 9% versus a year ago. While surfactant volume in our largest consumer products markets declined by less than 3%. Surfactant gross profit increased by 6.9 million in the first quarter, up 21% year-over-year The rising gross profit was driven by declining raw material costs, which led to a recovery of margin previously lost to escalating raw material costs. Europe and Latin America showed significant recovery from previously depressed margins.

Moving now to our Polymer segment, which represents 15% of total sales. First quarter net sales totaled 49 million, a decrease of 40% year-over-year. Segment volume declined 32% as compared to the year ago period. Polymer gross profits for the first quarter declined 3.9 million, or 37%. Phthalic Anhydride represented the majority of the segment's decline in volume and gross margin. Lower Phthalic Anhydride sales were primarily due to weakness in the automotive, housing, boating and recreational vehicle end use markets, where it is used as a plasticizer. Sales of polyol used primarily in rigid foam roofing insulation also declined, however lower raw material costs, helped minimize the decline in profitability.

Finally in our Specialty Product segment, sales totaled approximately $10 million, a decline of 5% year-over-year. With the segment sales accounting for 3% of the Company's total net sales for the quarter. Specialty products first quarter gross profit totaled 2.5 million, up 7% as compared to the year ago period.

Turning to Other income and expenses company-wide, interest expense declined $500,000, or 22% for the quarter, due to lower interest rates and declining average debt levels, working capital levels declined, due to lower raw material costs and sales volumes. The loss from equity investments in joint ventures roses by $500,000 to 800,000, due to the addition of operating expenses for the Tiorco LLC joint venture which began last year, developing the market for enhanced oil recovery surfactants. Our effective tax rate for the quarter rose to 34.8%, compared to 31.7% in the year ago period. The increase was primarily driven by higher foreign tax provisions, and lower US tax credits resulting from the lower biodiesel production.

Turning to the balance sheet. Consolidated debt as of March 31, 2009, was 132.1 million, down 10.9 million during the quarter, and down 24.8 million from the year ago period. As of March 31, 2009, net debt representing total debt less cash was 125.3 million, down by 1 million since last year end, and down by 28.3 million from one year earlier. Our total debt to total capitalization at quarter end was 37.9%, compared to 40.7% at year end 2008, and 41.7% a year ago. The ratio of net debt to net capitalization at March 31, 2009 was 36.7%, compared to 37.8% last year end, and 41.2% one year ago.

Capital Expenditures were 15.7 million in the first quarter, up 48% from the year ago period. Looking forward for the balance of 2009 we expect our full year CapEx to be in the range of 42 million to $46 million. As of March 31, 2009, the Company had Accounts Receivable days outstanding of 46.4 days, compared to 45.5 days in the year ago period. Looking now to our cash flows during the quarter, Stepan generated a total cash source of 15.3 million from operating activities, up from a use of 20.2 million in the year ago period. The improvement came from lower leveling of working capital, due to falling commodity raw material prices, coupled with the lower sales volume.

In terms of returning value to our shareholders, in the first quarter of 2009 Stepan paid out a total of $2.3 million in cash dividends to it's common and convertible preferred stockholders. During the first quarter, Stepan also repurchased 34,000 common shares in the open market for a total of $1 million.

Before I open the call to questions, let me provide some updated perspective on Stepan's outlook for the rest of 2009. We anticipate the recession will continue to negatively impact demand for polymers and functional surfactants for the balance of 2009. Within Polymers, Phthalic Anhydride sales volume will remain weak until the automotive, housing, and appliance industries begin to recover.

Seasonal demand for roofing insulation should improve polyol performance in the third quarter of this year compared to the first quarter, but volumes could remain 20 to 25% below last year. Surfactant volume in the laundry and personal care market is expected to hold up well with minimal decline. Functional surfactants will remain weak for the balance of the year. We will continue to drive costs down and strengthen our balance sheet, and position the Company for growth opportunities in the future.

This concludes my prepared remarks. At this time, I would like to turn the call over for questions. Operator, please review the instructions for the question portion of today's call.

Thank you. (Operator Instructions). There are no questions at this time. Actually we have a question from the line of George Gasper, please go ahead.

Good afternoon, Jim.

Hi, George.

Question, can you reiterate what you said about the oil field area, your progress on those projects, I am not sure exactly quite what you said.

Yes, let me clarify because in the functional surfactants market, we are really there talking about weakness in treatment chemicals, drilling fluids, and so obviously that business is slow.

I think you are probably curious about progress on enhanced oil recovery, and that is slow as well. Last time we spoke, we did have some pilot floods going on. We still have pilot floods going on. We don't have anybody going through any significant commercial quantities yet.

I think between the price of the lower price of crude oil and the tightness of capital, to make additional investments in fields we think that is going to slow down for a while, and take some time before we see, it probably will not see commercial quantity floods this year, we are still hoping that enough of the field tests would result in people moving forward next year.

Right. Okay. All right. And question on your surfactants, particularly in the fab soft in America, and from a domestic and international point of view. Can you just highlight the areas that you are in, and how you envision your volumes outlook, compared to let's say a year ago, and where are you on those comparisons, and where are the soft spots if any, and where are the positive spots, and why are there more positive spots, is there something going on in the marketplace that is helping you out?

Well, I think the biggest factor that is helping us relative to the overall economy is that at least the cleaning side of surfactants is a little more recession resistant. We are only seeing decline, now keep in mind, within surfactants the cleaning side, the personal care and laundry cleaning products make up about two-thirds of our surfactant business. And that is where we are only seeing modest volume declines running 3% in the first quarter, and we don't expect further deterioration in that.

So we are very pleased that that is the work horse portion of our surfactant business, and it is holding up very well. On the balance of the surfactants where we are seeing the weakness, is as I mentioned in oil field, not so much for enhanced oil recovery, but just down the well fluids, drilling and lubricating and treatment, well treatment, corrosion inhibitors.

The housing industry is obviously not recovering and we do have products that go into gypsum board, and other coatings and applications in the housing market, so that is very slow. Paint is slow. And institutional cleaning, so when you think of all of our surfactants that are used for hard surface in institutions, such as restaurants and hotels, obviously that segment of the market is very slow, and that won't recover until people start traveling again and using more restaurants, restaurants too are a big consumer of cleaning compounds. So that is the segment within surfactants where we are seeing the softness, and until this recession seems to run it's course, that probably won't turn around, we certainly don't expect any near term recovery, hopefully this recession will have an end to it, I am sure it will one of these days.

All right. Okay. And then in terms of the international market, and even domestic from a competitive point of view, are there any changes coming about, in terms of the competition, any withdrawals from markets that you are in that give you an opportunity, or other things going on on the merger front that create a situation for you one way or the other?

Well, we do not have any current projects underway that would be a near term event. We are actively searching the landscape, because your point is very well taken. There is a lot of disruption in the industry right now, the more highly leveraged companies may be prone to sell some product lines, or sell some assets.

It is common knowledge [Cantara] filed for bankruptcy earlier this year, and there is certainly a whole host of other companies that may have some problems coming their way, and we are actively out there trying to understand what the opportunities are that might present themselves, and going after them.

Yes, we view it somewhat as opportunistic, and a competitive advantage, because if customers are uncertain about the reliability of supply, hopefully they recognize that we have a healthy balance sheet, we are going to be around for the long-term, so hopefully that is a competitive advantage.

Okay. And then a question on biodiesel outlook. There is a lot of indigestion in the biofuels market at this point in time. How do you see yourselves positioned? I assume you are keeping the status quo in terms of investment. Do you see some still lower potential in the biodiesel market, relative to other biofuels?

We are still active in the market, but today we are selling much lower quantities. As the summer heats up we will switch from soybean oil to a greater percentage of tallow, which will give us a more cost effective product. So we do think volumes will pick up for the summer months.

Is our long-term view that biodiesel, I mean barring some fundamental change in the marketplace, either legislative out of Washington with stronger mandates, or some fundamental change in the price of crude and diesel fuel, or the change in feedstock costs, it is not an attractive market today, and we don't have any factors to say say that we would every reinvest in this in the short term, unless there is a major change in the landscape for that business.

Right. Okay.

We have been very fortunate, we have had other uses for those assets in the past six months that we have been able to take advantage of. So we will to the extent it is more cost-effective, we will use those assets to make other surfactant intermediates.

Okay. Thank you.

Thanks, George.

(Operator Instructions). Our next question is from the line of Beverly Machtinger, please go ahead.

Hi, Jim, how are you? I was wondering if you could clarify when you were talking about the product lines, and what is happening in the marketplace, is the same situation going on overseas? Are you seeing the same kind of weakness? Is this a global situation for the Company, or is it different domestically from what is happening in Europe, for instance?

It is global. And then I didn't mention our polymer business, which much more adversely affected when I was responding to George's question, clearly the phthalic anhydride market goes into a global end use market, automotive, housing, recreational vehicles. And so globally PA is down, demand is down significantly 30 to 40%. Fortunately PA is a small part of our business today, and we take a majority of that as a raw material into our PolyoI product. But even our polyol product for rigid insulation foam was off 30% in the first quarter.

We think there is an opportunity for that to improve over the next couple of quarters, as we get into our construction season and roof replacement season, as more than two-thirds of our foam goes into replacement roofs, as opposed to new construction. So we think that the polyol will improve in the next two quarter, but certainly well below last year's levels, and that is a global phenomenon too, it is liquidity, people aren't making, they are holding on to their cash, and not reinvesting, and therefore if they can defer and patch roofs, they will.

I was wondering if you could talk a little bit about your ventures into some of the new markets you are trying to address and what is happening there. I think China?

Well, China is still a polyol-only manufacturing site. We are doing some market study work in China, as far as future surfactant opportunities. With the Chinese economy being down, obviously it is not down near as much as Europe and North America, we are seeing a slow down in China as well. We are also focusing on other markets in China, primarily we went in for the flat roof rigid foam. We broadened out into sandwiched metal panel, construction panels, insulation between two sheets of metal for siding, and now we are trying to get more heavily into the appliance market, because certainly a significant number of refrigerators and washing machines are coming from China.

We think there are opportunities still in China to broaden our market, our product portfolio, end use portfolio in China, but it has been slow, and this economic slow down has not helped. But the polyol business in Europe and North America has clearly benefited from falling raw material costs. So while the volume is down, the profitability has not been hurt too badly.

Since you are on that subject I was wondering, have you been getting any kind of pressure from your end users to lower some of your costs, because it is pretty obvious that everybody knows that commodity costs are going down, and I was wondering if you are getting any kind of flack or feedback on that subject?

Well, that is a constant battle, and I don't think today is any different than any other year. I mean our people are always under pressure, up and down, either way, whichever commodity prices are going, it is always a battle with the customer. So, yes, they are very knowledgeable about what is going into their products, and what their costs are, so it is a constant battle.

I think the one understanding that people have is that the raw materials went up so much over the last two years, that people like us were following these increases, and so I think they understand that we are in some cases trying to make sure we hang on to margin, where we would like the levels to have been, if you go back a few years. So it is in part recovering margins that we have lost in the past. But, yes, the pressure will continue and certainly prices could go down further.

Okay. And then I guess one last question on India, any developments there?

No, I think certainly we have, we own a piece of land that we have made no further investment. We have got market study people working on India, but I think in this economic climate, we are not in any rush to deploy capital right now, until we see the economy improve. We are making a bigger effort with our Brazil operation, because we have got a plant there today. We added a multi-purpose reactor a year and a half ago, and we are going to go forward with a neutralizer.

So we feel there is a better market for the full range of our products in Brazil, and with a footprint already on the ground, it is more economical to expands that product line with this investment in the neutralizer. We are pretty excited because Brazil seems to be holding up pretty well, and it looks like it is going to be a growth opportunities for us.

Great, thanks a lot.

Thanks, Beverly.

Thank you. Our next question comes from the line of John Roberts. Please go ahead.

Good afternoon, Jim. Laundry and personal care aren't areas that normally have inventory cycles, but this is kind of an unusual cycle this time, and I think some consumer staple products have gone through inventory cycles, are you seeing effect of that and might there be a restock later in the year, if there was an inventory pull back by the customers?

You know, we think there may have already been some restocking, because one of the things that happened in North America, was last year with the hurricane season, there was a lot of disruptions of supply, so if people were window dressing balance sheets to keep their working capital down at year end, between the hurricane cycle and year end balance sheet management, I would think that would be behind us by now, but everybody, with the liquidity issues people are facing, it is quite possible people still are still going to need to replenish inventories.

And secondly as consumers shift towards private label brands, both in detergent and personal care, is there a trade down among the surfactants as well, that go into the products, or are the chemistry, the base chemistries at least relatively similar from your perspective?

Chemistries are relatively similar. I mean if somebody wants to have a lower active formulation, inserting a little more water in the formulation than the active cleaning compound, that would be it at a very low, low end product, that by and large it is a comparable formulation, and that is beneficial. We view that positively.

Thank you.

Thanks, John.

Thank you. (Operator Instructions). There seem to be no questions at this time, sir, I will turn the conference back over to you.

Thank you very much for participating in today's call. Good bye.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line.