Stepan Co (SCL) 2009 Q3 法說會逐字稿

Welcome to the Stepan Company third 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 Tuesday, October 20th, 2009.

I would now like to turn the conference over to Jim Hurlbutt, Vice President and Chief Financial Officer of Stepan Company. Please go ahead, sir.

Good afternoon and welcome to the Stepan Company third quarter 2009 conference call. Before I begin, please take 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.

Moving now to the quarterly review, I am pleased to report Stepan's financial performance was highlighted by record third quarter as well as year to date earnings and operating income, strong free cash flow generation from operations, and continued debt reduction. These achievements come through execution across the Stepan team worldwide despite a challenging economic environment. We began 2009 with the intent to drive results within each of our three business units and improve our performance. In each of the first three quarters, we delivered record net income as we benefited from the relative stability of our large laundry and personal care markets for our surfactant products, falling commodity prices within all three business units, and our ability to contain costs. Building on the strength of the first quarter and year to date financial performance, on October 19th, the board of directors increased the annual common stock dividend rate to $0.96 per share. This marks Stepan's 42nd annual dividend increase, highlighting our consistent focus and dedication to returning value to our shareholders.

At this point, let me walk you through the details of our solid third quarter 2009 results. We'll start with a look at the top line. Total net sales for the third quarter were $326 million, down 25% year over year. The decline in sales volume was primarily related to lower selling prices, which accounted for 15 percentage points of the decline; lower sales volume, which accounted for 7 percentage points of the decline; and lastly, lower foreign sales due to currency translation effect, which accounted for 3 percentage points of the sales decline. The lower selling prices were due to falling commodity raw material costs, which in some cases have recently begun to move higher.

Net income for the third quarter was $19.5 million, up 15% compared to net income of $17 million a year ago. Third quarter earnings per diluted share were $1.80 versus $1.59 in the year-ago quarter. Prior year net income included $11.3 million or $1.06 per diluted share of after-tax gains on the sale of a product line and some land. The strong quarterly performance was attributable to lower commodity raw material costs, successful cost control initiatives, and a desirable product mix for laundry and personal care products that have performed well during the economic downturn. Net income included $2.7 million in deferred compensation expense net of investment income, or the equivalent of $0.25 per share in expense during the third quarter compared to $1.7 million or $0.16 per share of expense in the year ago quarter. A detailed table around the financial effect of the deferred compensation plan has been provided in the earnings release for your reference.

Third quarter gross profit increased a robust 61% to $68.9 million as compared to the year-ago period. Operating expenses for the third quarter increased by $2.9 million or 9% as compared to the year-ago period, primarily as a result of the increase in deferred compensation expense. Excluding the impact of deferred compensation, quarterly operating expenses declined $1.1 million or 4% for the quarter and declined $2.2 million or 3% for the nine-month period. Cost containment efforts and favorable foreign currency translation contributed to the reduction in expenses.

Let's move now to a review of the performance of our three key business segments. First, we'll look at surfactants, the largest segment of our business, accounting for 74% of companywide sales. Third quarter net sales of surfactants totaled $240.1 million, a decline of 25% year-over-year. Surfactant sales volume declined 6% for the quarter and 7% for the year to date period. The economic downturn has had minimal impact on our largest surfactant market, consumer laundry and personal care, where volumes are slightly ahead of last year. Most of the surfactant volume decline was attributable to lower biodiesel sales, as the economics of biodiesel remain weak due to the high feedstock costs and lower diesel selling prices versus prior years.

Surfactant gross profit for the third quarter increased $13.1 million or 41%, and increased $32.8 million or 33% for the nine months. Gross profit improvement continued to be driven by lower commodity raw material costs, purchasing led cost reduction initiatives including freight and logistical savings. For the three months and year to date periods ending September 30th, 2009, the US dollar strengthened against nearly all the foreign currencies in the locations where the company does business. Consequently, net sales expense and income amounts were lower than they would have been had the foreign currency exchange rates remained constant with the rates for the same periods of 2008. Please see the table three in our earnings release for a summary of the effects of foreign currency translation on net sales and key income line items.

Moving on to our polymer segment, which represented roughly 23% of total sales, polymer's third quarter net sales totaled $75.4 million, a decrease of 20% year-over-year. Sales volume declined 13% as compared to the year-ago period, primarily as a result of lower sales of polyol used in rigid insulation foam for flat roof commercial construction. The recession slowed sales of new as well as replacement and retrofit construction. Polymer gross profit for the third quarter rose by $10.7 million or 120% to $19.5 million, despite a 13% decline in volume. Polyol products generated most of the improvement at a lower raw material cost as well as cost reduction initiatives. Our polyol expansion planned for our Germany plant site remains temporarily on hold, but we do believe we will need that capacity by 2011. Phthalic anhydride gross profit declined on 5% reduction in volume, primarily due to lower demand in automotive, housing, boating, and recreational vehicle end markets, which all remained weak.

Finally, in our specialty products segment, which accounted for approximately 3% of the company's total net sales for the quarter, specialty products sales totaled $10.8 million, a decline of 2% year over year. Sales volume was relatively flat. Selling prices declined slightly due to falling raw material costs. Specialty products' third quarter gross profit increased $2.7 million to $5 million, up 122% as compared to the year-ago period. The surge in gross profit was primarily attributable to lower raw material costs and improved product mix.

Moving now to other income and expenses, interest expense declined $900,000 or 38% for the quarter, and $2.4 million or 33% for the nine months due to lower average debt levels. The quarterly loss from equity investments and joint ventures increased $1 million or 75% due to tax provisions at the Philippine joint venture and start-up costs for our TIORCO enhanced oil recovery joint venture with Nalco. Interest in enhanced oil recovery remains relatively strong, with pilot projects continuing. Recent upward moves in crude oil will certainly help the economics of an enhanced oil recovery projects using surfactants.

Moving on to other net income and expense, we recorded third quarter income of $1.3 million, primarily from assets held for our deferred compensation plan. Our effective tax rate for the quarter rose to 35.6% compared to 30.2% in the year-ago period. The increase in the effective tax rate was primarily attributable to a greater percentage of consolidated income being generated in the United States, where the effective tax rate is higher than our foreign tax jurisdictions.

Moving now to the balance sheet, total debt as of September 30th, 2009 was $110.3 million, down $11.2 million for the quarter and down $32.7 million year to date, representing a 23% year to date reduction in total debt. As of September 30th, net debt, representing total debt minus cash was $37.3 million, down $28.4 million for the quarter, a decrease of 43%. For the year to date, net debt decreased by $88.9 million, or 70%. The lower net debt levels were attributable to improved earnings, coupled with lower working capital requirements. Working capital, excluding cash, declined due to lower raw material costs brought about by the decline in crude and natural oil prices.

Our total debt to total capitalization at quarter end was 28.5% compared to 40.7% at year end 2008 and 38.3% one year ago. The ratio of net debt to capitalization at September 30th, 2009 was 11.9%, compared to 37.8% at the year end 2008 and 36% one year ago. Capital expenditures were $7.5 million in the third quarter, down 55% from the year-ago quarter. Looking forward, we expect our 2009 full year capital expenditures to be in the range of $44 million to $48 million. As of September 30th, the company had accounts receivable days sales outstanding of 44.5 days compared to 45.9 days in the year ago period.

Looking now to our cash flows, during the current quarter we generated $33.9 million in cash flow from operating activities, up from $19.4 million for the same quarter in 2008. This cash flow increase was driven by improved earnings as well as lower working capital requirements. As a result of these factors, Stepan's total cash increased by $17.1 million for the quarter and $56.2 million year to date to $72.9 million. During the third quarter, Stepan repurchased 4,000 shares in the open market at a cost of $187,000 or $0.4707 per share. As of September 30, 2009, a total of 413,000 shares remained available under our share repurchase authorization. And finally, in terms of returning value to our shareholders, in the third quarter of 2009, Stepan paid out a total of $2.4 million in cash dividends to its common and preferred shareholders.

Before I open the call to questions, let me provide some updated perspective on Stepan's expectations for the full year 2009. We are positioned to deliver a record year in terms of profits from operations for 2009, though fourth quarter earnings will be lower than the previous three quarters due to seasonal volume declines and the acceleration of planned maintenance items, including a planned 2010 shutdown of our phthalic anhydride plant in order to complete the work this year while the PA market remains low. Building on our strong 2009 financial performance, we are now focused on driving business growth in 2010.

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.

(Operator Instructions). Our first question is coming from the line of Daniel Rizzo with Sidoti and Company. Please go ahead, sir.

Hi, Jim. You said that the surfactant sales to -- for personal products is fine, but everything else has obviously fallen. Has it leveled off at lower levels? Has it started to rebound at all, just the phthalic anhydride, the polyols, the different segments?

Well, PA has not shown much recovery yet. But PA actually slowed down before our polyol business. PA slowed down at the beginning of the recession, so the comparable quarter is not down that much from a year ago because it was already sluggish last year. But fortunately PA is a smaller portion of our polymer profit these days, because we use a significant portion internally in our polyol.

The polyol slowdown was more this year, so it is -- compared to last year, it is a bigger decline. We saw some improvement in the third quarter in volume, from the second quarter. We expect -- what we're getting from our customers is they're expecting a slow recovery. Our growth in that product line is going to be more focused on product line extension. Most of ours goes into flat roof construction, and we would very much like to gain market share in the side panel, where they inject foam in between two metal sandwich panels, as well as gaining regional volume in Europe and eastern Europe.

So we still see an opportunity to grow that volume despite -- no matter how slow we pull out of this recession. But you're right -- as far as surfactants, we're ahead of last year in the major component of surfactants. Probably we'll see some recovery in the rest of the surfactants slowly. But the biggest piece of fall-off for us in surfactants was really biodiesel, which is not a core surfactant business for us, so we're pretty pleased with the surfactant performance.

Okay. And with -- petroleum prices rebounding and natural gas to a certain extent too -- are you starting to see raw material costs coming back up?

Some increases. They've been slow so far. Crude's been somewhat volatile, so until we see a more steady trendline, I imagine it'll be -- we're not anticipating significant volatility for the balance of the year. So we'll have to stay tuned next year and see what happens.

Okay. And finally, you mentioned enhanced oil recovery, that you expect more demand as oil prices pick up. Could you just go over where we are with enhanced oil recovery and what your expectations are?

Clearly it slowed down when crude took the nosedive from $140 to wherever it bottomed out in the 50s, 60s. We're seeing continued interest because we do see a lot of the players looking at it as a long-term benefit to their older fields. So the TIORCO joint venture had an open house for their brand-new R&D facility in Denver, and we were very pleased to see a strong turnout of people in the business who would be interested going forward. We do have pilot projects ongoing today. We'll be shipping significant commercial quantities of surfactants through pilot projects in 2010 and some this year as well. For the real -- at this point, we're still building enough volume to break even on the costs of operating the joint venture. It will probably be at least 2011 before it really has the potential for contributing some earnings. And part of that will be dependent on crude oil, and certainly if crude oil continues to rise, that's going to accelerate the timeframe we would expect to be profitable on enhanced oil recovery.

Thanks, Jim.

Thanks, Dan.

And our next question is coming from the line of John Roberts with Buckingham Research. Please proceed with your question.

Hi, Jim. The fragrance companies that sell to your same customers, International Flavors and Fragrances and Givaudan, both have actually talked about accelerating sales. I would think your detergents, surfactants, and so forth would somewhat track. I know they sell into a lot of other products that's there, but I think there's been at least anecdotally restocking going on, possibly down the consumer supply chain?

We've seen pretty healthy volumes -- you're in surfactants, right?

They don't make surfactants, but they sell fragrances that would end up in the detergent chain.

We've been very fortunate, because the largest portion of our surfactants does go into household cleaning and personal care products, and our volumes are actually up year over year. So we didn't see a decline from which to look for recovery. In the functional surfactant markets, which we do have products that go into the housing and building products, that's where we did see some modest declines. But we're not seeing significant uptick in those volumes, but we're expecting rather slow recovery in those segments.

Thank you.

Agricultural has been a little bit of a pleasant surprise. That held up much better than we thought it would during the year, so. Again we have not seen a big decline in surfactant volumes from which to look for a big restocking level, so we have not seen that yet.

And your agricultural surfactants, are they going into things like Roundup blends?

Not roundup specifically, but competitive versions of Roundup and --

We've seen [like sale] volume hold up really well there. That's what you're talking about.

Yes, because we're going into those formulations. That's exactly where it's held up pretty strong.

Thank you.

Thanks.

(Operator Instructions). One moment, please, for our next question. There are no further questions at this time. I would now like to turn the conference back to you. Please continue with your presentation or closing remarks.

Okay, just want to thank everybody for participating in today's call. We're pleased to report good news to everybody. Thank you very much.

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