Stepan Co (SCL) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Stepan Company first-quarter 2013 earnings conference call. During this 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 1, 2013.

And I would now like to turn the conference over to Jim Hurlbutt, VP and CFO. Please go ahead.

Good afternoon, and thank you for joining the Stepan Company's first-quarter 2013 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.

I'd like to start today's discussion with a few comments on yesterday's acquisition announcements. The acquisition of Bayer Material Science's North American polyester resin business, including a 21,000-ton production facility located in Columbus, Georgia, will be the Company's largest acquisition to date.

Bayer Material Science is a leading North American producer of powder polyester resins for metal coating applications and liquid polyester resins for coatings, adhesives, sealants, and elastomer applications, also known as CASE applications. The production facility, which we are acquiring and speaking to you today from, houses a Research & Development lab for our technical service, or to our technical support, as well as new product development. Strategically, this acquisition will expand and diversify Stepan's polyol offerings as well as accelerate our efforts to grow in the CASE and polyurethane systems house, or PUSH, markets. The Columbus site will provide a flexible manufacturing option for our CASE and PUSH products, as well as business continuity location for our large lamination business in North America. The site has 5 reactors today, but it has been designed for 12. The acquired business has annual sales of approximately $64 million, and we expect the acquisition to be slightly accretive to our earnings in 2013.

The financial terms of the transaction were not disclosed. The closing of the transaction is subject to customary closing conditions and is projected to occur within four to six weeks.

During the quarter, we continued to advance our strategy of pursuing sustainable growth through the sale of more value-added products, new applications, new technologies, and new production facilities. First-quarter 2013 net sales declined 2% year-over-year to $456 million, primarily on lower selling prices associated with declining raw material costs. Sales volume was up 3%. Earnings from operations were down 9%, driven by lower surfactant margins as falling raw material costs led to lower selling prices and the Company consumed higher-priced inventory purchased in prior periods, lower polymer volumes, which were adversely impacted by a slow start to the construction season brought on by protracted winter weather in the United States and Europe, as well as a slow European economy.

While the slow-to-recover economy is expected to moderate growth in 2013, the strength of our balance sheet provides us with the flexibility to pursue internal as well as external growth opportunities, such as the aforementioned acquisition from Bayer. On the raw material's front, we have implemented select price increases to help recover higher raw material costs, particularly in our polymer business.

As part of our comprehensive strategy to generate shareholder value, Stepan returned $3.5 million to common and preferred shareholders during the first quarter through its cash dividends. In February, the Board of Directors authorized the repurchase of up to 1 million shares of its outstanding common stock. The repurchase authorization replaces the prior 2009 program, which had 170,000 shares remaining.

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

Thanks, Quinn.

I'll start my review with a look at the top line. Total net sales for the first quarter were $456 million, down 2% versus the year-ago quarter. The net decline in first-quarter sales was primarily related to lower selling prices, which accounted for a 5 percentage point decline in sales. The decline in selling prices was brought on by lower commodity raw material costs. Sales volumes were up 3%. As our prices are tied to raw material costs, volume growth is a more reflective of the underlying strength of the business.

Net income attributable to Stepan Company on a GAAP basis for the first quarter totaled $19 million, down 15% from the year-ago quarter. GAAP EPS was $0.83 per diluted share, down 15% versus the year-ago quarter. The impact of deferred compensation reduced GAAP diluted earnings per share by $0.11 in the first quarter of 2013. First-quarter non-GAAP net income, which excludes approximately $2.5 million in deferred compensation expense, declined 9% to $21.5 million versus the year-ago quarter. Non-GAAP EPS was $0.94 per diluted share, down 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, all of which were not material this quarter.

First-quarter 2012 gross profit declined 5% year over year to $72.7 million (sic - see press release "2013 gross profit"). Moving onto quarterly operating expenses, which rose $3 million or 7% versus the year-ago quarter -- higher operating expenses were primarily related to higher deferred compensation expense, resulting from the increase in the share price of Stepan Company's stock. Excluding the impact of deferred compensation plan expense, operating expense grossed 4% for the quarter, with that increase primarily related to headcount additions to support the Company's global growth initiatives. Looking now to net interest expense for the quarter of $2.2 million, which reflects a decrease of 16% versus the year-ago period, largely due to lower US debt levels.

The effective tax rate was 24.8% for the first quarter, compared to 31.7% in the year-ago quarter. The decrease was primarily attributable to the retroactive reenactment of the Research & Development Tax Credit, and other US tax credits. The retroactive component lowered our effective tax rate by 5.5% year-over-year.

Let's move now to 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 in the first quarter. Net sales of Surfactants totaled $340 million for the quarter, a decrease of 2% versus the year-ago quarter, which reflects lower raw material costs. Surfactant sales volume rose 5% for the quarter. Volume growth came broadly from both consumer products as well as higher-margin functional surfactants, which includes agricultural products that experienced a 20% increase in volume.

26%, Jim.

26% increase.

Surfactant gross profit declined by 4% to $51.6 million for the quarter. Despite higher consumer product volumes, margins declined as falling raw material costs led to lower selling prices as the Company consumed higher-priced raw material inventory. The margin contraction impact was partially offset by the favorable mix of higher margin functional surfactants, and continued earnings growth in Brazil.

Turning to our Polymer segment, representing 21% of sales in the first quarter, net sales totaled $96 million for the quarter, a decline of 1% versus the year-ago quarter. Polymer volume declined 7% for the quarter. Unlike surfactants, polymer raw material costs have been rising, leading to higher selling prices. Sales volume of polyol, primarily used in rigid foam insulation for commercial construction, declined 5%. The colder weather in both North America and Europe, combined with the slow economic growth in Europe, contributed to the volume decline. Polymer gross profit declined by 5% to $16.6 million as a results of the 7% decline in volume. Overall polymer segment margins were up slightly, on a slightly improved product mix.

Finally, looking at our Specialty Products segment which accounted for 4.5% of sales in the first quarter -- Specialty Products first-quarter gross profit declined 17% year-over-year to $5.2 million, as sales volume declined 3% over the same period. Food ingredient margins declined due to increased foreign price competition and higher raw material costs.

Moving now to the balance sheet. Total debt as of March 31, 2013 was $193.9 million, up $11.5 million in the sequential quarterly comparison, and down $7.1 million versus the year-ago period. As of March 31, 2013, net debt, representing total debt minus cash, was $139.1 million, up $33.6 million sequentially quarter due to the higher seasonal working capital requirements. Net debt was up $2.8 million compared to one year ago.

As of March 31, 2013, inventories net of LIFO reserves totaled $177.4 million, an increase of $15.4 million versus the sequential quarterly comparison, reflecting the low forecast US polymer demand and increased levels to support relocation of China polymer plant. Compared to one year earlier, inventories were up by $41.6 million.

Our total debt-to-capitalization as of March 31, 2013 was 28.2%, compared to 31.6% for the year-ago period. The ratio of net debt-to-capitalization as of March 31, 2013 was 21.9% compared to 23.9% for the year-ago period. Capital expenditures were $21 million for the first quarter. Looking forward, we project full-year 2013 capital expenditures to be within the range of $110 million to $115 million.

Turning to cash flows, first-quarter cash flow from operations was the use of $9.9 million compared to a source of $4.7 million for the corresponding quarter in 2012. For the first quarter 2013, inventories were a $16.5 million use versus a $23.2 million use for the comparable year-ago quarter.

As Quinn noted earlier, we recently expanded the share repurchase program during the first quarter. During the first quarter, Stepan purchased no common shares in the open market.

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

Thanks, Jim.

As we look out to the future, our acquisition of the polyester resins business from Bayer will help diversify and grow our polymer business. Surfactants could have a relatively flat year. Surfactant margins should improve as the year progresses, as we consume higher-priced inventories and raw material prices have declined. Surfactants should benefit from an improved product mix; agricultural surfactants continue to deliver strong volume growth. On the international front, Brazil continues to deliver earnings growth and we plan to make additional investments to support Brazilian growth.

Polymer volume should improve in the second quarter. The slow start to the construction season, brought on by the protracted winter weather that we had talked about, did adversely affect first-quarter volume. Price increases were implemented in April to recover higher raw material costs. Higher cost of total production in China will negatively impact Polymer earnings in 2013. Overall, the acquisition of Bayer's North American polyester resins business should be slightly accretive to earnings in 2013. However, lower first-quarter results will challenge us to deliver full-year earnings growth.

Today, we remain confident that our strategy will deliver long-term earnings growth. As we move forward, we will continue to evaluate additional investments that will accelerate growth and deliver value to our shareholders.

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

Thank you.

(Operator Instructions)

The first question comes from Greg Halter with Great Lakes.

Good afternoon.

Hello, Greg.

Regarding the acquisition, and I know it has not closed yet, but you made the comment about your expectations for it being slightly accretive. Would that include any one-time cost, step ups, and so forth associated with the acquisition?

No.

No.

Okay, so you would be pulling those out and showing them separate as one-time items? Or whatever you want to call them?

Yes, we're not expecting those to be material but, yes.

Okay. And, you provided the inventory data but wondered if you had the numbers for accounts receivable and payables as well?

Sure, Greg. Receivables for the quarter ended at $281,480,000 and prior period that was $255,858,000. And then payables were $150,727,000, I'm sorry compared to year-end of $141,668,000.

All right and obviously your tax rate was very low on the tax credits. Just wondered if you could provide us your expectations for the full year?

Yes, for the full year we should be a range of between 30.5% to 31% for the full year. So, obviously we could be slightly lower in ensuing quarters because obviously we had a very low rate in the first quarter, so the all full-year in rate would be in that 30.5% to 31% range.

All right. And I know there's always questions on the calls regarding the enhanced oil recovery, number one, and then the Elevance, the other partnership, just wondered if you could comment on both of those and what's going on currently?

Relative to enhanced oil recovery, we continue to have in excess of 30 projects within our portfolio. The pace of which those are moving towards pilot phase or commercialization remains to be a little slower than what we have liked. We still believe it is a very attractive opportunity for surfactants. We don't anticipate any significant change from 2012 to 2013 earnings for enhanced oil recovery.

We remain enthusiastic about the opportunities for 2014 and '15. With regard to Elevance, we have in the metathesis chemistry that Stepan Company has, there are derivatives, metathesis produce derivatives, that Stepan Company has developed from the Elevance material.

We have started sampling customers in the marketplace, those products and are looking forward to their feedback as to whether or not they see the value in the technology as we see, so. So, we're out in the marketplace for four, soon to be six different applications with that technology. So, we would anticipate getting more positive feedback throughout the second half of the year.

And I think I recall reading something about possibly one of those going into a sports drink kind of area? Is that accurate? Or, did I read something incorrect?

I think you read something incorrect. Our medium-chain triglyceride and CLA products have the potential to be used in sport drinks. Those are relatively small product lines that we have within our specialty group today. We do have a polymer that is now being used in athletic wear that we've introduced through a technology partner.

Okay.

One of our innovation projects.

And on the acquisition and, obviously, I know you can't really discuss a whole lot. But just wondered what they bring to the market for you, and then how their top line has been growing over the last few years? And, if you could comment about management and employees and retention and so forth that would be great? Thanks.

That's a lot. What I can say today is that Stepan Company has been working very hard on developing technology internally for both the CASE and the PUSH marketplaces. We have lacked a manufacturing base to make that happen in the marketplace. So, over the last several years, we've been looking at various assets around the world to help us implement our CASE and PUSH technologies.

The Columbus, Georgia manufacturing site has tremendous flexibility and will enable us to pursue our internal growth based on the chemistries that we've developed internally, and they also have a very good and growing business themselves in the powder coating business as well as liquid CASE products. So, the business has been growing. Probably about 4% or 5% per year.

But quite frankly, their growth has been limited by the production capacity of the current site. And so, we're interested in debottlenecking the site and expanding the site to support both growth in their market and in ours. From of people perspective, our intent is to offer all the existing employees employment, and to add additional resources to enable them, as Stepan Company, to achieve our combined growth objectives.

Thank you.

Just to be clear, Greg, those -- some of those capacity opportunities will take 12 to 18 months to implement. Some of the debottlenecking might occur sooner but it's going to, there will be a ramp up.

Thank you.

(Operator Instructions)

Question coming from the line of Jeff Hershey with Colombia Management.

Hello, good afternoon. Just a clarification on the Surfactants business, did you say that business was going to be relatively flat, and is that related to volumes or operating profit? Can you just clarify?

Want me to go first?

Yes.

Let me start with the clarification then Quinn can add his comments. We had a rough first quarter, there's no doubt about it. The margins contracted. We think a significant portion of that contraction will go away as we move out into the next quarter or two.

So, we're a little more optimistic that because the first quarter was low within surfactants, it will make it more difficult to exceed last year's surfactant performance. But we certainly have volume growth planned for the balance of the year and we see margin improvement. We anticipate our margin improvement over the next few quarters. So, it may be a little difficult to achieve higher earnings, but it's early in the year and were still somewhat optimistic.

And I would just comment that we had, as a result of our delayed start in Singapore, we had in excess of inventory that was purchased at a relatively high price that we're flushing through the system in the first, really the first half of the year. So, we continue to believe that we have an opportunity to generate flat or potentially slightly up surfactant earnings in 2013, but we're not anticipating significant growth in the surfactant market from a profitability standpoint.

We are anticipating volume growth throughout the year. We did experience 5% volume growth in the first quarter, and we think we can sustain growth throughout the year from a volume perspective.

Have things changed on the more commodity oriented surfactants? It seems like you had volume growth in both sides that business. Can you just comment if there's been any changes there?

Changes in the commodity side of the business?

Changes in terms of volume trends for detergents and the more commodity oriented surfactants?

I think as we look in the commodity segment of the marketplace, in that we're really talking about laundry for the most part. We have seen deformulation, and by that reduced actives in laundry products globally. And, so, we see that, I think most of that deformulation has already occurred on a global basis. But, there is no question that the demand for commodity surfactants versus three or four years ago is down globally versus what it was, again, four years ago.

Great, thanks a lot.

Yes.

And at this time there our no further questions. Please continue with your presentation or closing remarks.

Okay, I would like to thank everyone for joining Jim and I on today's call, as well as the entire Stepan team worldwide for their dedication and commitment to deliver value for you, our shareholders. We look forward to reporting back to you on our second-quarter results later this year. Have a great day. Thank you very much.

Thank you, ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines. Have a great day.