Stepan Co (SCL) 2012 Q3 法說會逐字稿

Welcome to the third-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, October 24, 2012. I'd like to turn the conference over to Jim Hurlbutt, Vice President and Chief Financial Officer. Please go ahead, sir.

Good afternoon, and thank you for joining the Stepan Company's third-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 Company. Quinn?

Thank you, Jim, and thank you all for joining us today. Stepan's third-quarter and year-to-date results reflect our ability to deliver sustained profit growth in a weakening economy, while preparing the Company for future growth. New geographies and a more attractive product mix, as well as our ability to manage commodity raw material volatility in our base business, is driving results.

Specifically, net income rose 6% in the third quarter, and increased 9% year to date versus last year. Net income excluding deferred compensation expense grew by 11% for the quarter, and 16% for the first nine months. All three business segments delivered improved earnings, despite a 3% decline in volume brought about by the weaker commodities Surfactant and Polymer sales.

Building on the strength of our balance sheet and current results, I am pleased to announce that our Board of Directors approved a 14% increase in the Company's quarterly cash dividend on common shares to $0.32 per share. This brings the annual dividend rate to $1.28 per share, and marks Stepan's 45th consecutive annual dividend increase, highlighting our commitment to return value to our shareholders.

The Board of Directors also declared a two-for-one stock split on its common shares in the form of a 100% stock dividend payable December 14, 2012 to stockholders of record on November 30, 2012. Concurrent with payment of the 100% stock dividend, the adjusted quarterly cash dividend rate on the common stock will be $0.16 per share, or $0.64 per share annually. With the improved performance of the Company and appreciation in the common shares over the last five years, we believe there is an opportunity today to improve the marketability and liquidity of Stepan shares by splitting the stock. The Company's preferred stock, which is convertible into approximately 1.1 shares of common stock, will be convertible at a rate of approximately 2.28 shares of common stock after the two-for-one split.

The Board of Directors also declared a quarterly cash dividend on its 5.5% convertible preferred stock at the quarterly dividend rate of approximately $0.34 per share, or an annual rate of $1.375 per share. Dividends remain a key part of our philosophy of providing value to our shareholders. Overall, our year-to-date results position Stepan to deliver significant earnings growth in 2012, and set a solid foundation for long-term growth.

At this point, I'd like Jim to walk through Stepan's third-quarter results.

Thanks, Quinn. And I'll start my review with a look at the top line. Total net sales for the third quarter were approximately $441 million, down 12% versus the year-ago quarter. The decline in third-quarter sales was primarily related to lower selling prices, which accounted for a 6-percentage-point decline in sales. The decline in selling prices was brought on by lower commodity raw material costs; lower volumes, which accounted for a 3-percentage-point decline in sales; and then foreign exchange translation, which contributed a 3-percentage-point decline in third-quarter sales, largely due to the weakening of the euro versus the dollar.

Net income attributable to Stepan Company on a GAAP basis for the third quarter totalled $20.2 million, up 6% from the prior year; GAAP EPS was $1.78 per diluted share, up 5% versus a year-ago quarter. The impact of deferred compensation reduced GAAP diluted earnings per share by $0.04 in the third quarter of 2012. Third-quarter non-GAAP net income, which excludes approximately $600,000 in deferred compensation expense, increased 11% to $20.6 million versus the year-ago quarter. Non-GAAP EPS was $1.82 per diluted share, up 10% from the year-ago quarter.

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. Also, please see Table 3 in our earnings release for a summary of the effects of foreign currency translation on net sales and key income line items.

Third-quarter 2012 gross profit increased 11% year over year to $71.3 million. Third-quarter operating expenses rose $6.7 million, or 22% versus the year-ago quarter. Excluding deferred compensation plan expense, operating expenses rose 10%. The higher level of administrative and general expense relates primarily to our planned headcount additions to support global growth initiatives in Singapore and Brazil, as well as routine wage increases.

Looking now to net interest expense for the quarter of $2.7 million, which reflects an increase of 19% versus the year-ago period, largely due to the $60 million private placement loan which was completed in the fourth quarter of 2011, in order to secure liquidity for growth opportunities.

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 71% of company-wide sales. Net sales of Surfactants totalled $313.1 million for the quarter, a decrease of 13% versus the year-ago quarter. Gross profit grew by 9% to $46.1 million, overcoming a 2% decline in volume. The volume decline was primarily among commodity Surfactants, due to lower usage levels, competitive pressures, and the weak economy. Higher value-added Surfactants used in household and industrial cleaning products, as well as agricultural products, posted higher sales volumes. The improved product mix, declining raw material costs, and profit growth in Brazil contributed to the improved Surfactant earnings.

Moving on to our Polymers segment, representing roughly 25% of sales, net sales totalled $110.2 million for the quarter, a decrease of 8% versus the year-ago quarter. Polymer gross profit increased by 19% to $20.5 million, overcoming a 4% decline in sales volume, on improved product mix and lower raw material costs. The favorable product mix included a urethane systems order sold to insulate an aircraft carrier. Volumes declined in both phthalic anhydride and polyol due to the slowing economy, as demand weakened as the quarter progressed.

Stepan's polyol, used primarily in rigid foam roof insulation, experienced a 3% decline in volume, but posted slightly higher profits. Given lower anticipated demand, the Company reduced its phthalic anhydride manufacturing capacity by shutting down its oldest fully-depreciated reactor. The remaining capacity is more than adequate to meet projected sales demand, as well as the Company's internal needs as raw material in the production of polyol.

Finally, we look at our Specialty Products segment, which accounted for approximately 4% of sales. For the third quarter, Specialty Products net sales totalled $17.7 million, up 2% versus the year-ago quarter. Specialty Products third-quarter 2012 gross profit increased 6% versus the year-ago quarter to $5.6 million, benefiting from a favorable mix of higher-margin nutritional supplements.

Moving now to the balance sheet. Total debt as of September 30, 2012 was $188.2 million, down $7.1 million in the sequential quarterly comparison, and up $1.6 million versus the year ago. As of September 30, 2012, net debt, representing total debt minus cash, was $108.5 million, down $17.3 million in the sequential quarter, due to lower working capital requirements. Net debt was down $45.7 million from the same quarter a year ago. Our total debt to total capitalization as of September 30, 2012 was 28.7%, compared to 31.8% for the year-ago quarter. The ratio of net debt to capitalization as of September 30, 2012 was 18.8%, compared to 27.8% for the year-ago quarter.

As of September 30, 2012, inventories net of LIFO reserves totaled $155.2 million, an increase of $17.3 million versus the sequential quarterly comparison. Compared to one year earlier, inventories were up by $18 million, primarily due to the addition of Singapore inventories during 2012. Capital expenditures were $20.1 million for the third quarter of 2012. Looking forward, we project full-year capital expenditures to be within the range of $90 million to $95 million.

Turning to cash flows, third-quarter cash flow from operations was a source of $41.3 million, compared to a source of $33.9 million for the same quarter of 2011, due partially to lower working capital demands in 2012. During the third quarter, Stepan purchased 5,000 shares of common stock in the open market, and had approximately 152,000 shares remaining under its treasury share repurchase authorization as of September 30, 2012. In the third quarter, Stepan paid out a total of $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.

Thank you, Jim. We expect to deliver solid earnings growth in 2012. Net income, excluding deferred compensation, is up 16% for the first nine months. While the economy has created a more challenging environment, we remain committed to our strategy to globalize our business, and to improve our product mix to deliver future earnings growth. Our Surfactant business is more recession-resistant, and should deliver record full-year earnings on greater functional, and household and industrial sales. Brazil will continue to deliver earnings growth. Our Polymer business should also deliver record earnings, despite the slowing economy.

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

Thank you.

(Operator Instructions)

Beverly Machtinger, Grace and White.

Good afternoon, gentlemen. I was wondering if you could update us a little bit about your plans for India and China?

Specifically from a China perspective, we have a polymer plant in China today, that the Chinese government is strongly requesting we relocate that. So, we are in the process. We have a contract for land-use rights today. We will be moving that site beginning in 2013. As we move the plant, we will expand our capacity from 20,000 tons to 50,000 tons. And, are enthusiastic about the long-term prospects for our polyol business in China. We have a limited activity going on from a surfactant perspective, and still working on a business case to develop our future plans there. From an Indian perspective, we have some land in India. And again there, too, we are looking to develop our business plans a little more specifically.

Okay. As far as the China facility, do you actually have sales in that country. Is there actual business going on? Are you importing product in there? Like the surfactants?

We are. We have a manufacturing facility today that is owned through a joint venture. Stepan owns 80% of the joint venture. We have Jinling Petro-chemical owns 20% of the joint venture today. So, we have sales in China today for our polymer products.

Okay.

And we are developing -- we have limited sales from a surfactants perspective. Overall, we probably have a little less than $20 million of sales in China today.

Okay. And is there -- what's the demand situation like? Is it a market you have to develop, or is it a market that is yearning for your product?

It is a market that is still in the developmental phase today. China has existing insulation requirements for buildings that are not fully embraced by the country today. And so, as the government enforces and encourages adherence to the existing regulations in China for building construction, our business will grow.

Okay. And then, I was wondering you could talk about the Polymer business in general. I know you said there is weakness in demand from that. But, I was wondering if you could be more specific geographically. Is the US business weak? Is it just Europe that is weak? Or is this just a general global malaise?

I would say we are more concerned about the health of the business in Europe today than in the US. In the third quarter, both the business in Europe and the business in the US were down. But, I guess we have more confidence that the US business will return to a growth position, than we have in Europe today. We are concerned about the European economy. And in that -- those comments relate primarily it to our flex-faced lamination, which is traditionally flat- or low-sloping roofs. We are seeing increased market share for Stepan in terms of the metal panel or vertical panels, versus horizontal applications within construction. So, we think we can offset some of the decline in the European market with new market penetration in the metal panel business.

Okay. And, lastly, I was wondering if you could just talk a little bit more about the surfactant switch to the higher value-added products? This has been an ongoing process for you and I was wondering if you are at -- I do not want to say a plateau -- but is there still a lot more room to grow the value-added business, or are you now more in a steady state between percent commodity versus percent value-added?

Fundamentally, I believe we have a lot of room to grow in the functional markets for our surfactant products. The ag business is growing on a global basis. And I believe our market share in that continues to improve, and there are opportunities for us -- specific short-term opportunities for us to grow into that segment. In addition to that, I think everyone is familiar with the renaissance of the oil-field market here in the United States. So, that is providing opportunities for us short term. And we also have -- we are optimistic about the long-term prospects for our enhanced oil recovery business.

Thank you.

Thank you.

(Operator Instructions) Jason Rogers, Great Lakes Review.

Hi.

Hello.

Looking at the aircraft carrier business, is that pretty much complete now? Or, is there any left over?

It is virtually complete for this aircraft carrier. There may be small residual sales in the fourth quarter, but essentially it's all done.

Okay. And then, looking at your expectations in the fourth quarter and heading into 2013 with volume growth and pricing, as well as raw material costs.

That is a fairly involved question. As we look at volume growth, we believe our Surfactant business will grow in 2013, and we believe we will continue to have opportunities in the functional markets, as I just mentioned. We do believe our business will continue to grow outside the United States, and specifically we remain enthusiastic about Brazil. From a margin perspective, we are seeing falling commodity prices in our Surfactant business today. So, we do believe that we can at least maintain our margins as we go forward in 2013, and maybe some opportunities to enhance margins. We will be looking at that as time moves forward.

In our Polymer business, we are seeing an increase in raw materials, primarily tied to petroleum. So we are seeing those move up. And, we do believe in North America, we can maintain our margins. In Europe, we are seeing a decrease in our margins for our polymer products, there.

Okay. And then looking at -- I think the release talked about costs related to the delay in the startup for the Singapore plant. What were those costs? Can you clarify them?

Well, we have the operating costs of the plant site. So, even though we were not producing during the quarter, we have incremental costs every quarter of the magnitude of a million-plus dollars per quarter. Hope to have the -- we have started up the plant this week. We hope we will be operating it smoothly during the quarter and absorbing that cost. But, yes, it has been an additional cost of operating a new site during the year.

Okay. And then, any new developments for the enhanced oil recovery and the renewable feedstocks?

Yes. Starting off with enhanced oil recovery, we have -- we are involved in today, approximately 30 different projects for enhanced oil recovery. They are moving through the pipeline. Progress, the time frame in which he this move through the pipeline, is a little bit slower than we anticipated. But we are encouraged by the amount of activity in the market. We don't see -- as a significant opportunity for 2013, but we do see benefits in 2014 and 2015. So, again, pretty -- we are still very bullish about it, still resourcing it with our joint venture partner significantly. And, we are planning on being successful and resourcing it accordingly. With regard to Elevance, we remain enthusiastic about the technology. More importantly, we have started to introduce that to the marketplace in the month of September. And so, our customers actually have that, the new technology, for certain segments, or target applications, in their hands today. And, we'll have a better feel over the next two or three months as they test it themselves.

All right. That sounds good.

To clarify, on the Elevance, the commercialization of those products will be a multi-year thing. The customers will be formulating and testing. So, we will not see any incremental contribution from those formulations for at least another year or two.

Yes.

Okay. And just, finally, some line items. Do you have the accounts receivable and accounts payable balances?

Yes, I do. Receivables at September 30 were $265 million. Inventories were $155 million. And, that is net of our LIFO reserve. And then, payables were $144.6 million.

And the receivable and payable balances should decrease as the year moves forward due to the price deflation that we've seen, particularly in our Surfactant business.

Okay. And, did you say the cash flow from operations was $43.3 million? Did I hear that right?

$41.3 million. $41.3 million.

Thank you very much.

(Operator Instructions) Kevin Hocevar, Northcoast Research.

Hi. Good afternoon.

Hi.

Could you elaborate, in the press release you talked about competitive pressures in the Surfactant business. Could you elaborate a bit on what those competitive pressures are?

Primarily, pricing.

Okay.

Yes.

Okay. So, mainly just pricing?

Yes. Pricing on a global basis. You know, in particular as the economy slows down, you can see increased price competition from people as they try to hang on to a piece of the pie.

Okay. And when -- I missed the very beginning of the call, so I do not know if you commented on this. But, could you mention, with the aircraft business, how much of a benefit this was during the quarter in terms of a revenue or volume standpoint?

It was helpful. And we benefited that from both a revenue and a gross profit perspective, and we will not comment specifically on the value of that.

Okay. And, in terms of the EOR business, I believe the flood you were supplying started in 2009, and I believe it was supposed to go on for three years. So is that flood coming to an end, or has it been extended? Just wonder if you could comment on that?

The customer is looking at extending that currently. A final decision will be made before the end of the year. It is ongoing today.

Okay. And, finally, it looks like there is -- you've had some price announcements here over the past couple months. Just wondering how those are sticking, and if you are getting all the pricing that you have asked for.

Most of them were in polymers, and we are not aware that there -- as far as we know at this point, they are sticking.

I think there has been a little bit of margin deterioration in Europe. But, for the most part, I think, we are pleased with where our margins are.

Okay, great. Thanks.

Thank you.

Mr. Hurlbutt, there are no further questions at this time. I will now turn the call back to you, sir.

I'd like to thank everyone for joining Jim and I on today's call, as well as the entire Stepan team for their dedication, and more importantly delivering higher profitability and long-term growth for you, our shareholders. We look forward to reporting back to you on our fourth quarter and full-year 2012 results call. Thank you. Have a good day.