Stepan Co (SCL) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth-quarter and full-year 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 on Wednesday, February 20, 2013. I would now like to turn the conference over to James Hurlbutt, VP and CFO. Please go ahead.

Good afternoon and thank you for joining the Stepan Company's fourth-quarter and full-year 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 prospect 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, President and Chief Executive Officer of Stepan Company.

Thank you, Jim, and good afternoon and thank you all for joining us today. 2012 was a good year for the Company. We continued to advance our strategy, delivered our fifth consecutive record income year, increased dividends for the 45th consecutive year, increased retained earnings by $78 million and positioned the company for further growth. Net income increased 10% to $79.4 million while full-year net income excluding deferred compensation increased 16% on 2% volume growth. Profitability improved in all three of our business segments.

Net sales were $1.8 billion, down 2%, primarily related to lower selling prices tied to lower raw material costs and foreign currency impact. In 2012, Stepan paid $12.8 million in cash dividends to its common and preferred shareholders. Yesterday, our Board of Directors announced the Company's quarterly cash dividend on its common stock of $0.16 per share and on its 5.5% convertible preferred stock of approximately $0.34 per share. Dividends remain a key part of our philosophy of providing value to our shareholders.

Stepan's stockholder equity has grown 70% over the last three years from $289 million to $479 million. The health of the Company's balance sheet remains strong and will allow us to invest in attractive growth opportunities.

I'm proud of what our team has accomplished in 2012 and look forward to the challenges the new year will bring. Overall, we believe our business is positioned to deliver earnings growth in 2013.

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

Thanks, Quinn. I will start my review with a look at the top line. Total net sales for the fourth quarter were $427 million, down 4% versus the year-ago quarter. The net decline in fourth-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.

Foreign exchange translations contributed to a 1 percentage point decline in fourth-quarter sales, largely due to the weakening of the euro versus the dollar. The aforementioned factors were partially offset by higher volumes, which accounted for a 3 percentage point increase in sales. Full-year net sales declined 2% to just over $1.8 billion.

Net income attributable to Stepan Company on a GAAP basis for the fourth quarter totaled $15.4 million, up 17% from the year ago quarter. GAAP EPS was $0.68 per diluted share, up 15% versus the year-ago quarter. The impact of deferred compensation reduced GAAP diluted earnings per share by $0.11 in the fourth quarter of 2012. GAAP net income for the full year rose 10% to $79.4 million, or GAAP EPS of $3.49 per diluted share.

Fourth-quarter non-GAAP net income, which excludes approximately $4.1 million in deferred compensation expense, increased 17% to $18 million versus the year-ago quarter. Non-GAAP EPS was $0.79 per diluted share, up 16% from the year-ago quarter. Non-GAAP net income for the full year rose 16% to $84.8 million for non-GAAP EPS of $3.73 per diluted share.

Deferred compensation expense is largely attributable to an increase in the share price of the Company's common stock, which rose $7.48 per share during the fourth quarter and $15.46 per share for the full year.

The detailed table outlining the financial effect on 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.

Fourth-quarter 2012 gross profit increased 17% year-over-year to $70.1 million and rose 14% for the full year to $291.6 million.

Turning to operating expenses, which rose $6.5 million or 17% versus the year-ago quarter, excluding deferred compensation plan expenses, operating expense rose 19% for the quarter and 13% for the full year. Higher operating expenses included increased headcount. Global headcount rose from 1848 people to 1920 people during the year to support growth initiatives. Fourth-quarter research expense also included higher product registration costs in Europe. Also contributing to higher expense in all categories was the effect of higher performance-based compensation expense due to the strong operating results for the Company.

Looking now to net interest expense for the quarter, it was $2.2 million, which reflects a decrease of 14% versus the year-ago period, largely due to lower average debt levels. The effective tax rate was 31.1% in 2012 compared to 30.8% in 2011. The increase was primarily attributable to the expiration of the US research and development tax credit, which was partially offset by an overall lower state effective tax rate. The U.S. Congress has reenacted the R&D credit in 2013, which will favorably impacted effective tax rate in 2013.

Let's move now to a review of the performance of our three key segments. First, we will look at Surfactants, the largest segment of our business, accounting for 73% of Company-wide sales in the fourth quarter. Net sales of Surfactants totaled $310.5 million for the quarter, a decrease of 6% versus the year-ago quarter. Full-year net sales declined 4% for the year due to lower selling prices which reflect lower raw material costs. Surfactant sales volume rose 1% for the quarter and 2% for the full year. Higher value-added surfactants used in agricultural products and household and industrial cleaning products posted higher sales volumes, whereas commodity surfactants used in North American consumer cleaning declined slightly as result of lower usage levels, competition and the weaker economy.

Sales volumes in Latin America were up on gains in Brazil and Colombia. Surfactant gross profit grew by 20% to $51.6 million for the quarter. Full-year gross profit grew by 14% to $203.4 million. The gross profit improvement was largely attributable to improved product mix and margin recovery as raw material costs decline. Value-added surfactants used in agricultural products and household and industrial cleaning products posted higher sales volumes. Also contributing significantly to the improvement were higher profits from Latin America, particularly Brazil, due to improved volume and operational efficiencies.

Moving onto our Polymers segment, representing roughly 24% of sales in the fourth quarter, net sales totaled $103.1 million for the quarter, an increase of 9% versus the year-ago quarter. Full-year net sales rose 1%. Volume rose 10% for the quarter and 3% for the full year. The volume growth was primarily from polyol used in energy-saving rigid foam insulation. The full-year 3% volume growth included gains from new applications in metal panels and adhesives.

Polymer gross profit increased by 31% to $16.6 million for the quarter on a 10% increase in volume. The profit improvement came from phthalic anhydride and polyol products. Polyol profit growth was attributable to a 12% quarterly volume growth, primarily from polyol used in rigid foam roof insulation. Full-year Polymer gross profit rose 17% to $71.9 million. Gross profit improvement benefited from a favorable sales mix of higher value-added polyol and polyurethane systems. Polyol volume rose 5% for the year. A large polyurethane systems order for an aircraft carrier and a business interruption insurance recovery related to a 2011 fire in our German polyol plant positively impacted the year.

Finally, we look at our Specialty Products segment, which accounted for 3% of sales in the fourth quarter. Full-year sales rose 24% due to the Company's acquisition of the Lipid Nutrition business in June of 2011 but declined in the fourth quarter due to lower medium chain triglyceride volumes on increased global competition. Specialty Products fourth quarter of 2012 gross profit declined to $2.9 million due to lower volume among both food ingredients and nutritional supplements. Full-year gross margin grew 7% to $20.3 million, driven by the full-year contribution of the Lipid Nutrition product line.

Moving now to the balance sheet, total debt as of December 31, 2012 was $182.4 million, down $5.8 million from the sequential quarterly comparison and down $17.1 million versus the year-ago period. As of September 31, 2012, net debt, representing total debt minus cash, was $105.5 million, down $3 million sequentially in the quarter due to lower seasonal working capital requirements. Net debt was down $9.9 million for the same quarter a year ago due to the deflationary impact of lower commodity raw material costs on receivables, partially offset by higher quantities of inventory on hand.

As of December 31, 2012, inventories net of LIFO reserve totaled $162 million, an increase of 6.8 versus the sequential quarterly comparison. Compared to one year earlier inventories were up $15.9 million, primarily due to higher quantities related to the Singapore start-up, Brazil operations and a planned inventory build in China.

Our total debt to total capitalization as of December 31, 2012 was 27.5% compared to 33% for the year-ago period. The ratio of net debt to capitalization as of December 31, 2012 was 18% compared to 22.1% for the year-ago period. Capital expenditures were $22.3 million for the fourth quarter of 2012. Full-year CapEx totaled $83.2 million, lower than anticipated due to timing of certain capital projects.

Looking forward, we project full-year 2013 capital expenditures to be within the range of $110 million to $115 million. As we undertake the relocation process of our polymer plant in China in 2013, we will also look to increase the production capacity of that facility from 20,000 to 50,000 tons annually.

Turning to cash flows, fourth-quarter cash flow from operations was a source of $31 million compared to a source of $64.8 million for the same quarter in 2011. For the fourth quarter of 2012, inventories were a $6.2 million cash use versus a $25.1 million cash source for the comparable year-ago quarter. On a full-year basis, Stepan generated $109 million in cash flow from operating activities versus $77.4 million in 2011.

During the fourth quarter, Stepan purchased a 23,000 common shares in the open market, and yesterday the Board of Directors approved a new Treasury share repurchase authorization of up to 1 million shares.

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

Thanks, Jim. Despite the headwinds from the global economy, we believe our strategy and ability to execute provide us with an opportunity for continued earnings growth in 2013. Our Surfactant business will continue to evolve. We will extend our commodity consumer product business, which provides us with economies of scale into emerging markets. We will improve our global product mix with greater sales into the agricultural, oilfield and household and industrial cleaning markets. Demand for crop protection chemicals is expected to remain strong. We are positioned for further profit growth in Brazil. Our Singapore plant is now operational and should contribute modestly to 2013 earnings. We believe our Surfactant business is positioned for earnings growth in 2013.

Polymers will experience continued growth for polyol use in energy-saving rigid foam insulation for new and replacement roofs. New applications for our polyols in metal panels and case products will also contribute. Polymers will face higher cost in China in 2013 and 2014 as we complete the government-mandated relocation of our plant. We will continue to supply Asian customers with product produced from an outsourced location in China or another Stepan site. We anticipate the higher cost of operation in China may limit overall profit earnings growth in 2013.

The Company will use its strong balance sheet to pursue internal and external opportunities to accelerate and deliver value to you, our shareholders.

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

(Operator instructions) Daniel Rizzo, Sidoti & Company.

With polyols sales being relatively strong, geographically, where was it the strongest? Was it more of a North American thing, or is Europe rebounding at all?

Europe had a pretty good fourth quarter. It was a little bit surprising to us. It had a poor third quarter, bounced back pretty well in the fourth quarter. But the North American business remains strong through the fourth quarter as well.

Is that what is leading growth, then, North America?

Our Surfactant business had a record year in North America in 2012 as well. So both our US polyol business and our North American US Surfactant business performed well in 2012.

Okay, and then you indicated you wanted to extend more into the emerging markets. I think in the past you have talked about building possibly a second plant in Brazil. Is that something that is ongoing? I don't know if you mentioned that already. Are you extending the plant that's already there?

We're in the process of looking at options to expand our plant that's already there, and we will continue to look for a second site in Brazil as well.

When would you have that kind of -- I know what you are doing in there by -- do you have any time frame?

We will let you know at the appropriate time.

Okay, and are you -- you mentioned --

What I have alluded to before is that if we are unsuccessful finding an acceptable second site, then we would clearly be forced into a situation of expanding the existing site. And that would probably come sooner rather than later.

Okay, great. And then you indicated that -- there was some price (inaudible) because raw material costs declined during the quarter. What are they doing now? Has it evened out, or is it still going down in terms of your raw materials?

On the Polymers side of our business, we are still seeing some increase in raw materials as related to petroleum oil. On the Surfactants side, they have seem to have stabilized at a fairly low level for coconut oil and palm oil, since the mid-fourth quarter of 2012.

Thank you, guys, nice quarter.

(Operator instructions) Greg Halter, Great Lakes Review.

Wondering if you could comment on where you see your tax rate going for 2013. It looks like the first quarter, you will probably get some benefit from the reinstatement of the R&D credit in the US. But, overall, where would you see your rate for the year?

Down slightly. Clearly, the R&D credit -- carryover benefit because you get to double up because what you weren't allowed to take last year you get to take this year in the first quarter. So first quarter should be lower than the year-ago first quarter. And the full year should be down slightly. I wouldn't look for a significant drop in the full year rate, but it should be down slightly year-over-year.

Is that on an adjusted basis or does that include the deferred comp when you are looking at that number? Because I think there's a difference, slight difference.

It's the all-in.

Okay, and the R&D was up quite a bit in the fourth quarter and you made the comments about product registration costs in Europe. Could you elaborate a little bit more on that aspect of the business and whether or not that continues into 2013 and whether or not that's a good or a bad thing, I guess?

It's actually a good thing but let me explain why. We have been at this for quite a few years now. Europe has a regimen of registration for chemicals. And to the extent people are unwilling to register products, they drop out of the marketplace.

Now, that's a small part of the benefit, but there is some benefit to it. Particularly year-over-year, though, these costs have been going on for several years, but last year in the fourth quarter, we had a cost sharing arrangement where we got more reimbursements from other participants. So we had low costs in the fourth quarter of last year, and then we were --

2011.

-- 2011, and then we had a more normal run rate in the full year 20 --

[14]. And then we will continue to supply -- we have approved a toll manufacturer in China, and then we will also supply from other sites in our network, Europe and the United States.

And what does that do to your cost? You made some commentary about it, that it will limit your growth there, but --.

We made money in China in 2012 and we will probably be looking at breaking even in that business over the next couple of years.

Okay, there was also some commentary relative to the fourth quarter in the Specialty Products area, competitive pressure, and wondered if you could comment on that and what you see going forward.

We've seen increased competitive pressure on the medium chain triglyceride product line, which is our historic product line within Stepan, increased competition from the backward-integrated Asian suppliers, who have been looking to move their 810 chain links into new and different markets. So it has been a paradigm shift in the marketplace. And so in the past there was limited competition from outside the United States in -- for MCTs, and we are seeing that now.

In 2013 we have gone back, we've recaptured some of that business, and the volumes will be up for 2013. But they will be at reduced margins.

Okay, and from a capital allocation standpoint, just wondered if you can comment on your thoughts relative to the dividend, which I presume you will continue to raise, share repurchase, and then merger and acquisitions.

From a capital perspective, as Jim mentioned, we have between $110 million and $115 million, we are currently forecasting. We spend roughly half of that on base capital to maintain our existing facilities, and we were planning on spending -- actually just a little less than half on growth projects throughout the world.

If we look at that from a regional perspective, roughly 50% will be spent in the United States and 50% will be spent outside of the United States.

From a dividend perspective, it is our intent to continue to pay increased dividends if we can, and we are anticipating being able to do so in 2013.

And then Treasury stock, Greg, is opportunistic. Our priority is to put our cash back into the business organically, whether it's, as Quinn said, through CapEx or through acquisition opportunities. That takes a higher priority than Treasury stock purchases.

And we are actively looking for acquisitions in the marketplace. Most of those would fall into the bolt-on category that either add a new geographic location to one of our existing businesses or extend the technologies that we have to horizontal or adjacent marketplaces. So we would like to use some of our healthy balance sheet to do that in 2013.

Alright, and I know it's usually asked, but I wanted to get your thoughts on the performance of the Elevance and the EOR joint ventures and what you see going forward with each of those.

We are out of the market introducing the Elevance technology, or the first three technologies, to our customer base today and waiting for feedback from them in terms of if they see the value and the technology that we see. So -- and we have got another three or four different technologies as well that we will introduce sometime in 2013. So that is proceeding according to plan and waiting for customer feedback at this point.

From an EOR perspective, our TIORCO joint venture, we still remain enthusiastic and excited about the opportunity for the use of surfactants to wash oil off of rocks. We are very pleased with the quality of projects within our pipeline, our project pipeline. We are disappointed with the speed at which our customers are implementing capital projects within their sites to implement the technology in the field. So we don't see a significant improvement or benefit from being in enhanced oil recovery surfactants in 2013, and we remain optimistic about 2014 and 2050.

And is that business still at a break even?

It's generating a loss today.

Okay, thank you.

It's an investment, not a loss.

(laughs) okay, thank you.

(Operator instructions). I will now turn the call back over to you, to senior management.

I would like to thank everyone for joining Jim and I on the call today as well as the entire Stepan team for their dedication and their ability to deliver value to you, our shareholders. We look forward to reporting back to you on our first quarter 2013 results. Have a great day.

Thank you, 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.