Stepan Co (SCL) 2012 Q1 法說會逐字稿

Welcome to the first quarter 2012 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 25, 2012. I would now like to turn the conference over to Mr. Jim Hurlbutt, Vice President and Chief Financial Officer. Please go ahead, sir.

Good afternoon, and thank you for joining Stepan Company's first quarter 2012 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 F. Quinn Stepan, Jr., President and Chief Executive Officer of Stepan.

Thank you, Jim, and thank you all for joining us today.

We are off to a good start, with net income up 19% versus last year, and earnings excluding deferred compensation -- effectively, earnings from operations -- up 30% from last year. In the first quarter, our business benefited from the investments we have made over the last several years to extend our core technology platforms to emerging markets, and to improve our product mix through innovation. We combine this strategy with a consistent focus on effectively managing commodity raw material costs, and driving operating efficiencies across our global business. Our results in 2012 will depend on our ability to deliver volume growth, particularly from our new assets.

In the first quarter, we delivered surfactant volumes up 4%, and polymer volumes up 7%. We plan to continue to deliver disciplined growth and value for you, our shareholders.

At this point, I would like Jim to walk through Stepan's first quarter results.

Thanks Quinn.

I will start my review with a look at the top line. Total net sales for the first quarter were approximately $465 million, up 10% versus the year-ago quarter. The rise in the first quarter sales were primarily related to higher selling prices, which accounted for 7 percentage points of growth; and increased volume, which accounted for 4 percentage points of growth. Foreign exchange translation contributed a 1 percentage point decline in first quarter sales.

Net income attributable to Stepan Company on a GAAP basis for the first quarter totaled $22.3 million, up 19% from the prior year. GAAP EPS was $1.97 per diluted share, up 17% versus the year-ago quarter. The impact of deferred compensation reduced GAAP diluted earnings per share by $0.12 in the first quarter of 2012. First quarter non-GAAP net income, which excludes $1.3 million in deferred compensation expense, increased 30%, to $23.6 million versus the year-ago quarter. This non-GAAP EPS was $2.09 per diluted share, up 28% from the year-ago quarter. A detailed table outlining the financial effects of the deferred compensation plan has been provided in the earnings release as table 2 for your reference. 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.

First quarter 2012 gross profit increased 24% year over year to a record $76.8 million. Selling price increased in improved sales mix, and higher overall sales volume drove the improvement. Turning to quarterly operating expenses, which rose $9.4 million, or 30% versus the year ago quarter. Deferred compensation plan expense accounted for $3.9 million of the increase. The higher level of selling and administrative expense primarily relates to investments made for future growth in Singapore and Brazil, coupled with our Lipid Nutrition Business acquired in 2011. These relate primarily to the addition of employees to support our international growth.

Sales and marketing expense rose 26% for the quarter, while admin rose 20% for the quarter, both driven by these global growth initiatives. Research and development expenditures rose 5% for the quarter versus the year-ago quarter. Looking now to net interest expense for the quarter of $2.6 million, which was up 26% versus the year-ago, largely due to higher debt levels associated with the Company's borrowing $65 million of private placement debt in 2011, carrying a 4.86% interest rate. The effective tax rate was 31.7% for the quarter, compared to a tax rate of 30.7% for the year-ago quarter. The increase was primarily attributable to the lower projected tax credits available in the United States, as Congress has not yet re-enacted the research and development credit.

Let's move now, to a review of the performance of our three key business segments. First, we will look at surfactants, the largest segment of our Business, accounting for 75% of company-wide sales. Net sales of surfactants totaled $347.2 million for the quarter, an increase of 7% versus the year-ago quarter. Sales volume rose 4% for the quarter. North America and Europe each recorded a 3% increase in volume, while Latin American volume rose 6%.

Improved volume of functional surfactants used in agricultural, oil field, and biodiesel, led to the growth in North American volume. Latin American volume growth was primarily due to our expanded capacity in Brazil. Surfactant growth gross profit increased 14% in the first quarter to $54 million, due to higher sales volume, the improved product mix, and the continuing recovery of higher raw material costs and selling prices. North America, Europe, Latin America all posted improved earnings.

Moving on to our polymer segment, representing roughly 21% of sales -- net sales totaled $96.7 million for the quarter, an increase of 12% versus the year ago quarter. Polymer volume increased 7%. First quarter polymer gross profit increased 57%, to $17.4 million. Selling price increases, aimed at recovering higher raw material costs, contributed to the improvement. The growth was also led by increased demand for polyol in Europe, where volume rose 12%; and in North America, where volume rose 7%. Sales volume of polyol, used primarily in rigid foam insulation, grew by 9%, due to higher demand for insulation in replacement roofing, and growing demand in metal panel insulation and adhesive applications.

Finally, we look at our specialty products segment, which accounted for our approximately 4% of sales. For the first quarter, specialty products net sales totaled $21.4 million, up 89% versus the year-ago quarter. Segment sales benefited, in large part, from the June 2011 acquisition of the Lipid Nutrition product line. Specialty products' first quarter 2012 gross profit increased 57% versus the year-ago quarter to $6.3 million. The improvement was attributable to the Lipid Nutrition product lines.

Now moving to the balance sheet. Total debt as of March 31, 2012 was $201 million, up $1.5 million in the sequential quarterly comparison, and up $15.3 million versus the year-ago. As of March 31, 2012, net debt, representing total debt minus cash, was $136.3 million, up $21 million during the quarter due to increased seasonal working capital requirements. First quarter 2012 net debt was up $3 million from the same year-ago quarter. Our total debt to total capitalization as of March 31 was 31.6%, compared to 33% for the year-ago quarter. The ratio of net debt to total capitalization as of March 31 was 23.9%, compared to 26% a year ago.

As of March 31, inventories net of LIFO reserves totaled $135.8 million, up by $25.4 million in the sequential quarterly comparison. Compared to one year earlier, inventories were up $16.5 million, with the increase due to raw material inflation and higher quantities to support customer service levels, and the start of our Singapore plant. Capital expenditures were $21.3 million for the first quarter of 2012, and looking forward, we are reiterating our expectations for 2012 full-year capital expenditure's to be within the range of $100 million to $110 million.

Moving to cash flows -- first quarter cash flow from operations was a source of $4.7 million compared to a use of $25.4 million for the same quarter in 2011. First quarter 2012 working capital increases were down by $24.7 million compared to the first quarter of 2011, during which we experienced significant raw material inflation. During the first quarter, Stepan repurchased 6,000 shares in the open market, and had approximately 190,000 shares remaining under its treasury share repurchase authorization as of March 31, 2012. In the first quarter, Stepan paid out $3.1 million in cash dividends to its common and preferred shareholders.

Before we open the call to questions, Quinn would like to provide some perspective on Stepan's forward-looking outlook.

Thanks, Jim.

I ended last quarter's call by stating we were enthusiastic about the opportunities we had to grow. Our strong first quarter reaffirms our enthusiasm. All three segments delivered record first quarter profits. Our surfactant Business experienced continued growth in higher value functional products used in the agricultural and oil field markets. Our expansion efforts in Brazil delivered solid earnings growth.

The Singapore methyl ester plant will start shortly, and begin shipping product during the second quarter. Polymer segment delivered a record first quarter on continued growth of polyol used in rigid foam insulation. Our polyol plant expansion in Germany is operational, and we anticipate polyol volumes will remain strong for the balance of the year. Our North American PA polyol plant will complete it's triennial shutdown in the second quarter.

We are pleased with the record profits that our specialty product segment delivered. The Lipid Nutrition product lines acquired last year are off to a good start. We look forward to further synergies with our historic business. We have the opportunity to build on our solid start, and deliver significant surfactant earnings growth in 2012, as we continue to pursue long-term initiatives that deliver value to you, our shareholders.

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

Certainly. (Operator Instructions) Our first question comes from the line of Kevin Hocevar with Northcoast Research.

Hi, guys. Good afternoon.

Hello, Kevin. How are you today?

Good. The surfactant volume seemed pretty strong here in the first quarter. Do you think that will be sustainable at those levels for the rest of the year? Also, could you break out consumer products versus functional? Of that 4% growth, how much was from consumer, and the difference between that and the functional?

Short answer is yes, we believe our surfactant growth for the year is sustainable. Consumer products was essentially flat in North America for the first quarter, and for the year. I think we're projecting minimal growth in consumer products in North America. Most of the growth is coming from our functional business, and some benefit from the biodiesel business we are in, as well. We are seeing large consumer growth in, as we said, Europe and Latin America.

Okay. In terms of TIORCO, it looks like that lost a little bit in this first quarter. I think in the last quarter's call, you guys had thought this would break even this year. Is that still your projection for the rest of the year? That it will break even?

Let me clarify, Kevin. This is Jim. You have to keep in mind, we still account for TIORCO as a joint venture. So what you're seeing on the press release line item is solely the expenses related to TIORCO. The profit on our sales into the enhanced oil recovery market are embedded in the surfactant segment results.

But I guess having said that, we are projecting that the TIORCO, our enhanced oil recovery business, will generate a loss in 2012. The time frame for project implementation in the large volume and profit contribution will probably be in late 2013-14. We are investing in that business today. We are scaling that business to be successful long term. But today, based on the digestant time of the projects that we're currently involved in, we don't anticipate any significant net economic benefit for the Company in 2012, and minimal benefit in 2013.

Okay. Sticking with the innovation side, could you give a little update on Elevance, where that stands, a brief update on Elevance?

For those who aren't familiar, Elevance is a company that is a start up company that has exclusive license to natural oil derivatives of a technology called metathesis. They're leveraging a Nobel Prize winning -- or award-winning catalyst technology to make feed stocks that we would use to make derivatives. The derivatives that we're looking at making are going to be used in our traditional surfactant markets for hard surface cleaning, laundry, agricultural adjuvants, and et cetera. So we are working through the process.

We have identified six target molecules that we are planning on introducing to the marketplace in Q2 to Q3. Those molecules will not be registered until Elevance gets registrations on the feed stock. Again, so the digestant time for the technology we will be 2013 or '14 in terms of our market financial impact for the Company. But we are very excited about some of the things that we have seen in terms of what the new technology could do. We will be introducing those to our customers in Q3 of this year, and we are going to have a better feel as the year unfolds, as our customers begin to play with these new, unique molecules, and the products we are making from them.

Okay, thank you very much.

Thank you, Kevin.

Our next question comes from the line of Daniel Rizzo with Sidoti & Company.

Hi guys, just a quick question. You indicated that some of your expenses were up, due to some of the initiatives you guys have going on. I'm talking about the marketing and administrative. Is this run rate what is probable going forward?

We would anticipate some of our growth expenses will actually increase slightly as the year unfolds, as we fill open positions that we have identified. So some of our operating expenses will go up slightly from where they are at today.

Okay, thank you.

Thank you. (Operator Instructions) We do have another question. It comes from the line of Greg Halter with Great Lakes Review.

Hello, guys, good afternoon.

Good afternoon.

Jim, couple questions on the balance sheet. Wondered if you had available the accounts receivable and payable figures?

Absolutely. As of 12-31, the receivables are $288 million, inventories are $135.8 million, and payables are $151.3 million.

You said 12-31. You meant 3-31?

Yes, 3-31, I'm sorry.

The receivable was $288 million, correct?

Yes.

Again, you've touched on this briefly already, but marketing expense, I think, was up about 27% year-over-year. As Quinn, you just mentioned you will see some increase there, at least through the three categories. Does that include marketing expense, and do you see them up at this type of percentage on a year-over-year basis going forward?

Yes, Jim. Why don't you --

Yes. We will see it up at that level. Keep in mind that a good chunk of this is the Lipid Nutrition product line acquisition. So, we've got all of those new employees weren't in the first quarter of last year, and then we did staff up for some of these global growth initiatives, so we've added people that are also contributing to the higher level of operating expenses.

We've added a significant amount of people in Poland, Brazil, and in Singapore, consistent with the areas that we have targeted for growth.

Okay. On the Lipid though, that anniversaries in June.

That's correct.

So you can get some year-over-year bumped down.

Yes. The year-over-year comparison will come down, but the absolute run rate that you are seeing now isn't going to -- as Quinn said, it is more likely to creep a little bit higher as we fill additional positions we are trying to fill.

Okay. On the enhanced oil recovery, now that Nalco has been absorbed by Ecolab, is there any change in the joint venture structure format, or what have you?

To date, we have seen no change from Nalco's interest in the joint venture. In fact, they are still very enthusiastic about the joint venture. We have seen no structural difference as a result of Ecolab's ownership of Nalco.

Are you still working on the commercial test floods, and any results you can share there?

We are still working on some commercial floods, and what I would say today is that some of our customers are very pleased with the results that they have. Other customers did not get the full oil that they were projecting out of the flood, and we are working with them to understand why the test was not completely successful. So, it's still a developmental market. We, as TIORCO and our customers, are still learning exactly how to implement pilots around the world.

Okay. There is a comment in the press release, in fact in the last paragraph, where the opportunity to build on a solid start and deliver significant earnings growth in 2012, and then Quinn, I thought in your prepared remarks, you said significant surfactant growth. I just wonder, is that true for both, or am I misreading or mishearing something?

Both. Both.

Okay.

I think we are optimistic across all three of our businesses today.

And would you care to venture what significant means? Is that 5%, 10%, or 25%?

I do not care to venture.

All right. I thought I would give you a chance.

Thanks, I appreciate the opportunity.

One last one for you. Relative to raw materials and the outlook for price increases, just wondered where we stand as of the 25th of April.

We have a number of our raw materials, some of them are moving up, some of them are moving down. But for the balance of the year, we are projecting somewhat stability, from a large picture perspective, stability of raw materials throughout the course of the year. So I don't anticipate significant changes in our margins as the year goes forward, at least as a result of raw material actions.

Okay, thank you very much.

Thank you. We have no further questions at this time. I would like to turn it back over to Management for closing remarks and comments.

Thank you very much. I would like to thank everyone for joining Jim and I on the call today. We look forward to reporting back to you on our second quarter 2012 results. Have a great day. Thank you very much.