Stepan Co (SCL) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Stepan Company first quarter 2011 earnings conference call. During today's 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, May 4, 2011. I would now like to turn the conference over to Mr. Jim Hurlbutt, Vice President and CFO. Please go ahead, Mr Hurlbutt.

Good afternoon and thank you for joining the Stepan Company first quarter 2011 financial review. 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 & Exchange Commission filings. Stepan led off 2011 with sales growth of 25% year-over-year on higher selling prices, improved volume, although earnings were slightly below last year levels. We continued to make progress across our capacity expansion initiatives, as well as the integration of our recent acquisitions in the developing global markets.

We also saw polymer demand exceed expectations in the quarter. Higher raw material prices, particularly for crude and natural oils, were influential during the quarter. Accordingly, we implemented a range of price increases across our surfactant and polyol businesses. However, even with these increases aimed to help offset higher raw material costs, the rising commodity prices did impact gross margin and earnings during the quarter. Our price increases implemented during the quarter drove Stepan's selling prices and net sales materially higher. We continue to take appropriate steps to adjust pricing in order to mitigate the impact of higher raw material prices, as the global economic recovery is driving commodity prices higher. To this point we have implemented another round of price increases in the second quarter aimed at improving margin performance and recovering higher raw material prices.

Profitability was also impacted by higher operating costs of our plant expansions in Brazil and Germany, as well as our new plants in Poland and Singapore. These strategic investments in expanding our global production capacity are expected to generate incremental sales throughout 2011. Notably, we expect sales volume in Brazil to ramp up over the next two quarters. Overall we see excellent opportunities in the region and feel we have significantly improved our presence there. The anticipated completion of our polyol plant expansion in Germany in the current quarter will allow us to better address sold out European demand. More stringent insulation standards adopted in Europe, have been a positive factor driving increased demand for our polyols. Our German expansion and polyol acquisition broadened our polyol offering in Europe and positions us for improved financial performance in that region.

Our significant investments in expanding our global business in the mature, as well as emerging markets, is providing us an excellent balance of opportunities for growth. We also remain focused on innovation to differentiate our offerings to enhance the value we deliver our customer, as well as enhancing the margins we deliver our shareholders. Overall we are pleased with the financial progress made in the first quarter across our strategic and financial objectives and are setting the stage for future growth.

Now let's walk through the first quarter results. Starting with the top line, total net sales for the first quarter were $423 million, up 25% year-over-year. The rise in first quarter sales was primarily related to -- higher selling prices, accounting for 20 percentage points of the growth, which were precipitated by the rapid inflation in crude, natural oil, raw material prices; higher sales volume accounted for 4 percentage points of the growth; and a 1 percentage point increase was caused by foreign exchange translation.

Overall volume rose 4% in the first quarter. Net income attributable to Stepan Company on a GAAP basis for the first quarter totaled $18.8 million or $1.68 per diluted share, down 9% compared to GAAP net income of $20.7 million or $1.88 per diluted share in the year ago quarter. The impact of deferred compensation increased diluted earnings per share by 7% year-over-year or $0.05 per share in the first quarter. Non-GAAP net income, which excludes approximately $500,000 in pretax deferred compensation income, declined 6% year-over-year to $18.2 million or $1.63 per diluted share. A detailed table outlining the financial impact of the deferred compensation plan have been provided in the earnings release for your reference. First quarter 2011 gross profit declined 3% year-over-year to $61.8 million.

Operating expenses, which grew 7% year-over-year, and excluding deferred compensation plan effects, the operating expenses grew just 2% for the quarter compared to the year ago period. General administrative expenses increased 4% due to the additional costs of the Singapore operation. Research expenditures rose 4% for the quarter due to higher salary expense, which includes new headcount in Poland. Marketing expenses declined 1% on lower bad debt provisions.

Now let's move 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 77% of Company wide sales. Net sales of surfactants totaled $324.9 million for the quarter, a rise of 24% year-over-year. Sales volume grew 1% for the quarter, which includes the consolidation of the Stepan Philippine volumes.

Selling price increases led to a 24% increase in net sales. Surfactant gross profit declined $1 million or 2% for the quarter. The decrease in first quarter gross profit was primarily due to higher raw material costs escalated by rising crude and natural oil prices. Overall price increases have been announced for the second quarter of 2011 to help recapture the cost of rising raw material expense.

In North America gross profit improved slightly as the effects of a decline in laundry volume were offset by higher functional surfactant sales. Europe gross profit declined on a 1% drop in volume and lower gross profit margins. In Brazil our plant expansion start-up led to higher plant operating costs during the quarter. We expect sales volume in Brazil will ramp up over the next two quarters, providing earnings growth in that region.

Turning to our polymer segment representing roughly 20% of sales. Polymer net sales totaled $86.4 million for the quarter, an increase of 37% year-over-year. Volume increased 19% for the quarter versus the year ago. Polymer gross profit was unchanged year-over-year, despite a 19% increase in sales volume. Higher raw material costs led to lower margins in Europe and North America. Commodity raw material prices surged higher during the quarter following the rapid rise in crude oil. Once again, we have announced selling price increases for this segment during the second quarter to help offset higher raw material costs.

Polyol product gross profit declined 6% in the first quarter versus a year ago due to the lower margins. Polyol sales volume increased 26% versus the year ago quarter. Stepan's polyols are used primarily in new and replacement commercial flat roof insulation. Polyol demand in the rigid insulation market is exceeding our expectations, as higher energy costs lead to greater use of insulation. It is important to note our insulation business is primarily commercial in nature, not linked to residential construction. Our business is also more heavily weighted in the commercial roof replacement market.

We are looking forward to completing the expansion of our polyol plant in Germany during the second quarter and we will continue to support sold-out European demand with products in the United States. Product approvals for new specialty and PET polyols produced at our plant in Poland are taking longer than expected and resulted in a small operating loss for the site.

Finally, turning to specialty product segment, which accounted for approximately 3% of sales. For the first quarter specialty products net sales totaled $11.3 million, down 3% as compared to the year ago period. Specialty segment gross profit declined 21% for the quarter, down $1.1 million year-over-year. The first quarter decrease was primarily the result of higher raw material costs and lower sales volume in specialty pharmaceutical applications. Food ingredient sales volume was a lone bright spot rising 10% year-over-year.

Looking now to interest expense for the quarter, which was $2.1 million, rising 64% versus the year ago period, largely due to higher interest rate costs associated with the Company borrowing of $40 million of private placement debt in 2010. For the quarter the loss related to our TIORCO joint venture, net of the profit on direct surfactant sales to enhance oil recovery customers, was $1 million. We expect the results to turn profitable over the balance of 2011 due to increased sales volume.

As oil prices continue to climb higher, we believe that our enhanced oil recovery operations will gain additional momentum, as producers look for cost effective ways to increase their oil production.

Pilot surfactant floods are showing higher production levels and should lead to full scale commercial projects. Commercial floods will require long lead times for site preparation. We remain optimistic that enhanced oil recovery will become a significant market for surfactants and Stepan Company.

Our effective tax rate for the quarter was 30.7% compared to 34.6% for the year ago period. The lower first quarter tax rate was primarily attributable to structural changes that will provide a recurring benefit in lowering the effective tax rate on foreign earnings.

Moving now to the balance sheet. Total debt as of March 31, 2011 was $185.7 million, down $5.9 million in the sequential quarterly comparison and up $82.6 million versus the year ago period. As of March 31 net debt, representing total debt minus cash, was $133 million, up from $27.7 million compared to one year ago. The year-over-year increase in net debt was due to higher working capital levels due in large part to the inflationary impact of higher commodity raw material costs on inventory and receivables, which were up $107.6 million combined compared to one year earlier. Our total debt to total capitalization at quarter end was 33% compared to 25.3% a year ago. The ratio of net debt to capitalization as of March 31, 2011 was 26% compared to 8.3% a year ago. Capital expenditures were $22.5 million for the quarter, up 73% from the year ago quarter.

Looking forward, we expect our 2011 full year capital expenditures to be within the range of $95 million to $105 million, including the capacity expansion project in Singapore. Looking now to our cash flows. During the first quarter we used $25.4 million in cash flow for operating activities compared to a net use of $3.3 million in the same quarter of last year. Current year cash flows have been heavily impacted by the higher working capital growth, up $21.4 million year-over-year, driven by raw material inflation. During the first quarter the Company made no open market Treasury share repurchases. Stepan had approximately 251,000 shares remaining under its Treasury share repurchase authorization as of March 31, 2011. In terms of returning value to our shareholders through cash dividend distributions, in the first quarter of 2011 Stepan paid out a total of $2.8 million in cash dividends to its common and preferred shareholders.

Before I open the call to questions, let me provide some perspective on Stepan's forward-looking financial guidance. In order to accelerate our growth, we have made investments in faster growing markets in Brazil, Poland, Singapore, and Germany, which have led to planned higher operating expenses. The Brazil expansion is complete and volumes should ramp up over the second and third quarters. The German polyol expansion will start up during the second quarter and contribute to profit improvement during the third quarter. We have increased our selling prices to address rising raw material costs and remain optimistic about our prospects for volume growth and margin improvement over the remainder of the year.

Surfactant earning improvement will be led by unit margin improvement, improved sales mix of higher margin functional surfactants, and the volume growth in Brazil. The rise in crude oil prices will stimulate demand for surfactants used in enhanced oil recovery. Polymer demand exceeded expectations in the first quarter, which should lead to further growth as we get into the summer roof replacement season. While 2011 will have additional start-up costs associated with the new or expanded plants, we have the opportunity to deliver full year earnings growth.

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.

Daniel Rizzo with Sidoti and Company.

For the polyol demand in Europe, is that -- is most of the demand coming from Europe or are you seeing like a rebound in North America and other parts of the world as well?

It was certainly heavier in Europe, but I believe we were up 7% or 8% in North America as well quarter to quarter, but Europe was up even more, significantly more, and we feel pretty good that it should be sustainable this year.

In North America?

Both. Obviously Europe at a higher rate than North America, in part driven by these insulation standards.

Got you. And then since demand is exceeding production, are you going to be raising prices in addition to what you would be raising to meet the higher raw material costs?

I don't know if I would go that far, but we're certainly -- yes, we're -- oh, yes, we are, absolutely. We're trying to recover the margin that had been lost in the last six months.

No, I mean beyond that?

I would say we're anticipating margin improvement in the remaining quarters of the year relative to the first quarter. I am not sure if that's quite answering your question whether we're going to have a significant increase in margin. We believe it will be a significant increase in margin.

Okay. And then with the surfactant -- the increased surfactant sales that's going to be coming from Brazil just with increase in production, is that new demand or are you increasing market share?

Well, we're sort of the newer entrant into the market, so we base loaded the site with business with Unilever, the former owner of the plants. So as we push out into the market there, we're obviously picking up business in a growing market and increasing our presence in the market, so it is incremental growth for us for sure, as the market expands as well.

All right. Thanks.

Thanks, Dan.

(Operator Instructions) Mr. Hurlbutt, we seem to have no more questions on the telephone lines at the moment. I will now turn the call back to you.

That makes for a short day. Thank you very much. I look forward to talking to you all again next quarter. Thank you very much.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.