Stepan Co (SCL) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth-quarter and full-end 2011 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, February 15, 2012.

I will now turn the call over to James Hurlbutt, Vice President and Chief Financial Officer. Please go ahead, sir.

Good afternoon, and thank you for joining the Stepan Company's fourth-quarter and full-year 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 and Exchange Commission filings. That being said, I would now like to turn the call over to Quinn Stepan, Jr, President and Chief Executive Officer of Stepan Company.

Thank you, Jim, and thank you all for joining us today. I am pleased to report that Stepan delivered our fourth consecutive year of record net income, our 44th consecutive annual dividend increase, and another year of appreciation in our stock price. At Stepan, we are focused on delivering value to you, our shareholders. In 2011, net income was $72 million, up 10% from 2010. Excluding deferred compensation, net income was $72.9 million, up 8% over 2010.

Results were driven by higher functional surfactant and polyol sales. Utilizing our strong balance sheet, we made progress expanding our footprint into markets that are growing rapidly, with new capacities for Brazil sulfates, German polyols, and soon, Singapore methyl esters. Methyl esters are a key building block for Stepan's higher margin amphoteric business. Singapore production should allow us to globalize our methyl ester derivative business. We continue to pursue greater innovation and invention within the Company. Although commercialization is slower than anticipated, we are enthusiastic about opportunities for enhanced oil recovery surfactants and derivatives we are developing from unique metathesis feed stocks.

At this point, I would like Jim to walk through Stepan's fourth-quarter and full-year results.

Thanks, Quinn. Starting with the top line, total net sales for the fourth quarter were approximately $444 million, up 23% versus the year-ago quarter. Full year 2011 net sales rose 29% to $1.84 billion. The rise in fourth quarter sales primarily related to higher selling prices, which accounted for 19 percentage points of the growth, and increased volume, which accounted for 5 percentage points of the growth. Foreign exchange translation contributed a one percentage point decline in fourth quarter sales. Overall, volume rose 5% in the fourth quarter, with volume rising 3% for the full year.

Net income attributable to Stepan Company on a GAAP basis for the fourth quarter totalled $13.2 million, up 55% from the prior year. GAAP EPS was $1.17 per diluted share, up 54% versus the year-ago quarter. Full year GAAP net income rose 10% to a record high $72 million, our fourth consecutive year of record earnings, resulting in fully diluted GAAP EPS for 2011 of $6.42, up 9% year over year. The impact of deferred compensation reduced GAAP diluted earnings per share by $0.19 in the fourth quarter and $0.08 for the full year. Fourth quarter non-GAAP net income, which excludes approximately $2.2 million in pre-tax deferred compensation income, increased 35% to $15.4 million versus the year-ago quarter. Non-GAAP EPS was $1.36 per diluted share, up 33%. 2011 full year non-GAAP net income rose 8% to $72.9 million, with non-GAAP EPS up 7% year-over-year to $6.50 per diluted share. A detailed table outlining the financial effect of the deferred compensation plan has been provided in the earnings release as Table 2 for your reference.

Fourth quarter 2011 other expense rose versus the year-ago quarter, with the increase comprised of higher interest expense and a higher expense associated with equity joint ventures. Also, please see Table 3 in our earnings release for a summary of the effects of foreign currency translation on net sales in key income line items. Fourth-quarter 2011 gross profit increased 19% year-over-year to $60.1 million. Selling price increase and improved sales mix drove the improvement. Full year 2011 gross profit increased 8% versus the year ago to $255.6 million.

Moving on to quarterly operating expenses, which rose 5% versus the year-ago quarter, and full year operating expenses rose 7% year-over-year. It is worth noting that investments for future growth opportunities in the Netherlands, Singapore, Brazil, Poland, and the Philippines increased total operating expenses by $2.1 million for the quarter and $7.2 million for the full year period. Administrative general expense rose by 9% for the quarter and 11% for the year, also led by our global growth initiatives. Please note that the prior year included a $1.4 million credit for lower estimated future environmental remediation costs. Excluding the impact of that year-ago credit, full year administrative expense rose just 7% year-over-year. Research and development expenditures rose 7% and 6% for the quarter and full year periods, respectively. Marketing expense rose 13% for the quarter and 14% for the year, driven by our global growth initiatives.

Looking now to net interest expense for the quarter of $2.6 million, which was 64% versus the year-ago period, largely due to higher debt levels associated with the Company's borrowing of $65 million of private placement debt in 2011, incurring a 4.86% interest rate. The effective tax rate was 25.5% for the quarter, down from 29.4% a year ago. The full year effective tax rate was 30.8% compared to the year-ago rate of 35.4%. The decrease was primarily attributable to the implementation of the holding company structure that will provide a recurring benefit, lowering the tax rate on foreign earnings.

Let's now 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 75% of Company-wide sales. Net sales of surfactants totaled $331.4 million for the quarter, an increase of 24% versus the year-ago quarter. Full year net sales of surfactants rose 29% to $1.36 billion. Sales volume rose 5% for the quarter and increased 2% for the full year.

Improved volume of functional surfactants used in agricultural, oil field, and biodiesel applications offset weakness in North American consumer product applications. Surfactant gross profit increased 28% fourth quarter to $43 million, due to a more favorable sales mix of functional surfactants that more than offset the impact of weaker consumer product sales volume. Brazil contributed to the higher fourth quarter gross profit on the growing sales volumes made possible by our plant expansion, completed during 2011. Full year surfactant gross profit increased 8% year-over-year. Agricultural surfactant volume finished with a strong fourth quarter and full year improvement.

Turning to our polymer segment representing 21% of sales. Net sales totaled $94.2 million for the quarter, an increase of 11% versus the year-ago quarter. For the full year, polymer net sales increased 28% to $421.5 million. Volume increased 2% for the quarter and 9% versus the respective year-ago period. Fourth-quarter polymer gross profit declined 11% to $12.7 million, due to weaker phthalic anhydride or PA margins resulting from consuming higher-priced raw material inventory. For the year, polymer gross profit grew by 11% to $61.6 million, driven by higher sales volumes of polyol. The growth in polyol volume more than offset lower gross profit on phthalic anhydride.

Fire damage repairs to our second polyol reactor in Germany have been completed, and no property damage loss was recorded, as insurance is expected to cover the damage. The fire did result in business interruptions and higher costs of supplying product from the US to Europe. Business interruption insurance claims are expected to be settled in 2012, and consequently no benefit has been recorded in 2011. Sales volume of polyol used primarily in rigid foam insulation grew by 14% for the year due to higher demand for insulation in replacement roofing on commercial buildings and growing demand in metal panel and adhesive applications.

Finally, we'll look at our specialty product segment, which accounted for approximately 4% of sales. For the fourth quarter, speciality products net sales totaled $18.5 million, up 102% versus the year-ago quarter and up 40% for the full year period. Segment sales benefited in large part from the June 2011 acquisition of the Lipid Nutrition product line. Specialty products' fourth-quarter gross profit increased 68% versus the year-ago quarter to $5.3 million. Fourth quarter improvement was attributable to the Lipid Nutrition product line acquisition. Full year gross margin grew 6% to $19 million.

Moving now to the balance sheet, total debt as of December 31, 2011, was $199.5 million, up $12.9 million in the sequential quarterly comparison and up $7.9 million versus year-end 2010. As of December 31, net debt, representing total debt minus cash (audio difficulties) was down $38.8 million from September 30. Net debt rose $35 million since year-end 2010, primarily due to the inflationary impact of higher commodity raw material costs on inventory and receivables (audio difficulties) at year-end 2011 was 33%, compared to 35.2% a year ago. The ratio of net debt to capitalization at year-end 2011 was 22.1%, compared to 18.5% a year ago.

As of December 31, 2011, inventories net of LIFO reserves totaled $111.2 million, down by $26 million in the sequential quarterly comparison. Compared to one year earlier, inventories were up $14.6 million, with two-thirds of the increase due to raw material inflation and the remainder plan to support customer service levels. Capital expenditures were $22.2 million for the quarter and $83.2 million for the full year 2011. Looking forward, we expect our 2012 full year capital expenditures to be within the range of $100 million to $110 million.

Turning to cash flows. Fourth-quarter cash flow from operations was a source of $64.8 million, compared to a source of $19.9 million for the same quarter in 2010. On a full year basis, Stepan generated $77.4 million in cash flow from operating activities. During the fourth quarter, Stepan repurchased 3,000 shares of stock in the open market and had approximately 211,000 shares remaining under its treasury share repurchase authorization as of December 31, 2011. In the fourth quarter, Stepan paid out a total of $3 million in cash dividends to its common and preferred shareholders. For the full year 2011, we paid out a total of $11.5 million in cash dividends to our shareholders.

Before we open the call to questions, Quinn will provide perspective on -- (audio difficulties).

(audio difficulties) -- to accelerate growth over the last two years, have created the opportunities for increased earnings in 2012. Surfactant growth will come from our expanded operations in Brazil, start up of our new plant in Singapore, and greater sales -- greater global sales of higher-value functional surfactants used in the agricultural, oil field, and enhanced oil recovery markets. Our polyol volume is projected to grow in 2012 as recommendations to use higher insulation levels to reduce energy consumption are implemented throughout the world.

The German polyol plant is up and running. Our polyols -- again, as Jim said, are primarily used in replacement roofs versus new construction. Our specialty product business is positioned for growth in 2012, based on last year's Lipid Nutrition product line acquisition. Overall, we are enthusiastic about the opportunities we have to grow in 2012.

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

Thank you. (Operator Instructions). Our first question comes from the line of Jason Rogers with Great Lakes Review. Please proceed with your question.

Good afternoon.

Hello, Jason.

Looking at some of the balance sheet items, I don't know if you mentioned them, but the receivables and accounts payable.

Yes. Did we lose Jason?

No, I'm here. Accounts receivable.

You just like us to comment on the receivables?

If you gave a figure out for the receivables and the payables.

Just the actual amount?

Right, exactly.

So, we ended the year with receivables at $260.2 million and inventories of $110.4, which is net of our LIFO reserve. And then I assume you wanted payables as well, which is $135.6 million.

Okay. And looking at the North American surfactant market, some of the weakness there, is that due to customers using less active ingredients? And are you seeing any -- if that's the case, any reversal of that currently?

Yes, I think due to higher commodity prices throughout 2011, we did see consumer product companies reformulate and deformulate their commodity range products in the laundry and the dish categories. So at this point in time, we're not anticipating that people will go back and increase their active levels in their products at this point.

Okay. And what were the costs related to the fire for the quarter? The German plant.

If we take a look at it, there's costs associated with the rebuild that we believe will be covered by insurance. The order of magnitude of that was about EUR1.8 million, and then if we look at the business interruption claim, it will probably be somewhere in the EUR1.5 million to EUR2.5 million range.

Okay. And looking at the tax rate, what do you expect for 2012?

Roughly 32%.

Okay.

Should be able to hang on a good portion of the savings that we've built into the tax rate in the past 12 months, due to a tax restructuring we did in late 2010.

Okay. Thank you very much.

(Operator Instructions). Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.

I got a question in terms of polyol volume, it looks like they grew 13% in 2010 and 14% in 2011. How should we think about that in 2012? Do you think that they can keep this pace, or do you think it will moderate a bit?

You know, overall, I would say that we're in a comparable range. It may be down slightly as we look at 2012, in part because we're coming off of a higher base. We do anticipate to be significant growth in the marketplace.

Okay. And then in terms of -- based on how much raw materials increased in 2011, how much of that were you able to offset with price? And is there -- do you expect that maybe you will be able to recover all raw material cost increases in 2012 through price?

Yes. If we take a look at -- we run our business and we focus a lot on our unit margin on a per-pound basis, and as we look at 2010 going into 2011, our actually unit margin was actually up a little bit. Now, gross profit percent is down because of the high rapid inflation that we had. But we anticipate that our unit margins from 2011, 2012 will be flat, so, therefore, we believe we can cover the price increases that we have in the marketplace.

Okay. Great. Thank you very much.

You're welcome.

And we have a follow-up question from the line of Jason Rogers, Great Lakes Review. Please proceed with your question.

Just looking at the enhanced oil recovery area, I know you mention it's going a little slower than anticipated, but I wondered if you could talk a little bit about any new developments there, as well as what your expectations are for profitability of that business for 2012. Thanks.

Okay. Yes, I guess we're very encouraged by the results of the pilots that we're currently involved in. The lag that we're seeing in terms of the financial impact for Stepan Company is because our customers are taking a fair amount of time to implement the capital projects in their fields. And so -- but we're very encouraged by the results, again, of the pilots that we're in. In 2012, we believe that the business will be marginally profitable, more or less at a break-even level. And then we're anticipating income growth in 2013 and '14 based on the scale-ups of the various projects that we're involved in.

Thank you.

Please hold while we are assembling the queue. I will now turn the call back over to management. There are no further questions at this time.

Okay. I'd like to thank everyone for joining Jim and I on the call today. We look forward to reporting our first quarter 2012 results on our next call. Thank you for your interest in our Company, and have a good day.

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