Stepan Co (SCL) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Stepan Company's third-quarter 2013 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded Monday, October 21, 2013.

I would now like to turn the conference over to Scott Beamer, Chief Financial Officer. Please go ahead.

Go ahead, sir. You may proceed with your presentation.

Good afternoon. Thank you for joining Stepan Company's third-quarter 2013 financial review. It's my pleasure to join you. I am Scott Beamer. It's my pleasure to join you for the first time on this call. I'm very excited to be part of Stepan Company and extremely optimistic about our Company's strategy and the opportunities that lie ahead.

Before we begin, please note that information in this conference call contains forward-looking statements which are not historical facts. These statements involve risk and uncertainties that could cause actual results to differ materially, including but not limited to prospects of our foreign operations; global and regional economic conditions; and factors detailed in the Company's Securities and Exchange Commission's filings.

That being said, I would like to turn the call over to F. Quinn Stepan, Jr., President and Chief Executive Officer of Stepan.

Thank you, Scott, and thank you all for joining us today. Looking at our third-quarter 2013 performance, despite the challenging operating environment, we delivered improved earnings. Net income of $20.4 million rose 1% from the prior year, with net sales and volume up 8% and 9%, respectively.

Excluding deferred compensation, net income was $21.1 million, up 2%. Surfactants, Polymers, and Specialty Products all delivered net sales growth versus the prior year.

Within our core business lines, higher raw material cost inventory in our Surfactant business billed to support our Singapore plant startup and the subsequent decline in commodity prices negatively impacted our Surfactant business by $1 million in the quarter and $4 million year to date. Our Singapore methyl ester plant is operating well and contributed to our profitability in the quarter, and the remaining negative impact of this inventory will not carry beyond 2013.

The Polymers segment delivered strong quarterly results, despite low global economic growth and the negative year-over-year impact of our China operations. Operating costs increased versus last year as we continued to invest in our long-term growth and expand our research and develop capabilities and build our organizations in Latin America and Asia.

I am pleased to report that on October 18, our Board of Directors declared a 6% increase in the Company's quarterly cash dividend. The increase brings Stepan's annual dividend rate to $0.68 per share and marks the 46th consecutive year in which Stepan has increased its quarterly dividend rate on its common stock.

Dividends are a key component of our comprehensive and ongoing commitment to generating shareholder value. In the first three quarters, Stepan has paid out cash dividend distributions to common and preferred shareholders totaling $10.7 million. Overall, we delivered slightly improved results in the third quarter, and we remain optimistic about our long-term growth.

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

Thanks, Quinn. Total sales for the third quarter were $475.5 million, up 8% versus prior year. The net increase in the third-quarter sales was primarily related to higher volumes, which accounted for 9%. This was partially offset by 1% lower selling prices. The decline in selling prices was brought on by lower commodity raw material costs and increased competitive activity.

Net income attributable to Stepan Company on a GAAP basis totaled $20.4 million, up 1% from prior year. GAAP EPS was $0.89 per diluted share in both periods. The impact of deferred compensation reduced GAAP diluted earnings per share by $0.03 in the third quarter. The deferred compensation expense was largely attributable to a 4% increase in the Company's share price during the quarter.

The third-quarter non-GAAP net income, which excludes approximately $696,000 in deferred comp expense, increased 2% to $21.1 million versus prior year. Non-GAAP EPS was $0.92 per diluted share, up 1% from prior year. A detailed table outlining the financial effect of the deferred comp plan expense has been provided in the earnings table as Table 2, for your reference. Also, please see Table 3 in our earnings release for a summary of the effects of the foreign currency translation on sales and the key income line items.

Third-quarter gross profit rose 4 percentage points over prior year to $74.3 million. Gross profit benefited from a $3.7 million business interruption insurance recovery related to a 2011 fire in our German polyol plant, partially offset by the $1 million higher-priced methyl ester inventories built up in prior periods to support the Singapore plant startup.

Surfactant margins were down slightly, as the slow global economy and select customer deformulations reduced demand and increased competitive activity.

Quarterly operating expenses, excluding deferred compensation, increased by $5 million or 14% versus prior year. Approximately half of this increase related to higher spending on growth opportunities in R&D and in emerging regions.

In China the Company incurred $700,000 of expense to dismantle and vacate the existing plant site, as mandated by the government. The remaining increase related to a favorable benefit adjustment in the prior year which did not repeat.

Net interest expense was $3 million, which reflects an increase of 11% versus prior year due to higher average debt levels absorbed to enable the second-quarter acquisition of the Bayer MaterialScience North America polyester polyol business.

The year-to-date effective tax rate was 28% compared to 32% a year ago. The lower rate was attributable to a favorable mix of earnings from lower tax regions in the world and attributable to the retroactive enactment of the US Research and Development Tax Credit in the first quarter.

Now let's move to a review of our key operating segments. First I will cover Surfactants, which is the largest segment of our Company and accounted for 67% of total Company sales in the quarter.

Net sales of surfactants was $318.4 million for the quarter, an increase of 2% versus prior year. Surfactants sales volumes grew by 7%. North America surfactant volumes were up 2%, and all regions delivered greater growth.

Specifically, the Singapore plant was fully operational, which drove volumes in Asia; and previous capacity expansions delivered growth in Brazil. Globally, agricultural products continued to deliver strong volume growth, while sales of functional surfactants used in oil fields declined. Surfactant gross profit declined by 2% to $45 million.

North American consumer product earnings continued to be negatively impacted by consumption of higher-cost raw material inventories purchased in prior periods to support our Singapore plant startup. Additionally, North America gross profit declined due to slightly lower consumer product margins, lower sales of functional surfactants used in oil fields, and reduced profitability from biodiesel sales. Asia, Europe, and Latin America all delivered higher gross profit in the quarter.

Moving on to our Polymers segment, net sales totaled $137.6 million, an increase of 25% versus the prior year. Polymer sales volume grew by 19% in the third quarter. North American polyol used in replacement roof insulation was flat. European polyol grew by 29% despite the economic headwinds in the region, with new applications, including metal panel, contributing.

The second-quarter acquisition of the North American polyester resins business from Bayer MaterialScience accounted for 40% of the global polymer volume, or 8% of the total segment's growth. Polymer gross profit grew by 30% to $26.6 million. The increase was primarily from Europe and reflects a combination of sales volume growth, discussed above, and the business interruption insurance recovery of $3.7 million.

Finally, our Specialty Products segment, with $19.5 million in sales, was up 10% versus prior year. Specialty Products sales volume was relatively flat versus prior year. Specialty Products gross profit declined by 33% to $3.8 million due to lower margins associated with our medium-chain triglyceride product line, which is used as a food ingredient.

Moving now to the balance sheet, total debt as of September 30 was $277 million, down $9 million from the second quarter and up $89 million versus last year. Since December 31, consolidated debt has increased by $95 million, and this increase is due to the $100 million new private placement to fund the second-quarter acquisition mentioned above.

As of September 30, net debt, representing total debt minus cash, was $174 million; down $5 million from the second quarter and up $68 million versus December 31, 2012. As of September 30, the ratio of net debt to total capital was 25% compared to 18% as of the prior-year end, for the reasons previously mentioned.

As of September 30, 2013, inventories net of LIFO reserves totaled $178 million, a $7 million increase versus the second quarter. Compared to prior-year, inventories were up $23 million from the Bayer acquisition and higher levels to support the planned shutdown of the China polymer plant.

Capital expenditures were $25 million for the third quarter and $67 million year to date. For the full year we expect capital expenditures to be within the range of $90 million to $100 million.

Regarding cash flows, third-quarter cash flow from operations was a source of cash of $40 million compared to a source of cash of $41 million for the third quarter of 2012. For this third quarter, inventories were a $6 million use of cash versus a $16 million use of cash for the third quarter of 2012.

Regarding our share repurchase program, there were no open market repurchases during the quarter.

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

Thanks, Scott. While our performance in the first three quarters has made achieving full-year earnings growth difficult, we continue to pursue investments and will accelerate our growth. In 2014 we will realize the benefits of our recent acquisition and other capacity expansions.

Surfactant consumer product volumes will benefit from continued growth in Brazil. As previously noted, our Singapore methyl ester plant is operating well and is now contributing to our profitability. The remaining negative impact of this inventory will not carry beyond 2013.

Surfactants sold for use in enhanced oil recovery are expected to improve compared to the slow year-to-date results. Demand for agricultural surfactants should remain strong.

The second-quarter acquisition of the North American polyester resin business from Bayer should be slightly accretive to earnings in 2013, and more so as capacity is increased to manufacture additional polyol products for the coatings, adhesives, sealants and elastomer -- CASE -- applications.

Early fourth-quarter polyol orders are strong in both North America and Europe, as it appears we are getting some business not shipped earlier in the year due to poor weather. We continue to have a healthy balance sheet, and we increased dividends for the 46th consecutive year, reflecting our continued commitment to generating shareholder value.

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

(Operator Instructions).

This is Scott and Quinn. We did not hear any question.

Jason Rodgers, Great Lakes Review.

This is Greg Halter on for Jason. Well, he is actually on, as well. And welcome, Scott, to your first call.

I want to ask about the oil field area. I think in the last quarter, you had mentioned you have, I think, greater than 30 projects in the portfolio; but they have come across slower than what you would like so far. Just wanted to delve in that a little more -- whether or not there's been any change in the thinking of the users of the product? Or maybe you could just help us understand what is going on in that particular area.

Yes. I think we are seeing some delayed project implementation. There is some increased activity by several of the customers, but not all the customers -- where they are having investment opportunities in the oil shale regions of the United States, in particular.

So some of those companies that have the opportunity to do both have delayed their implementation of some of the EOR projects in the field. Order of magnitude, we still have approximately 30 opportunities that we're actively resourcing with our TIORCO joint venture. And the projects continue to move forward, but at a much slower pace than we anticipated. But at this point in time we anticipate improved performance in 2014, but not significant volumes.

Okay. And relative to the move in China, if you could maybe elaborate on where you stand in regards to that move -- the planned move, I guess?

We mentioned in the conference call that our performance is down year over year. We're down approximately $3 million. We made income last year. We have had some write-offs and accelerated depreciation this year. So we're down significantly from an operating income perspective year over year in China.

We continue to discuss compensation for our move with the Chinese government. We are not currently satisfied with the status of those conversations, and it remains a work in progress.

Okay. And that's all I have at this point. Thanks.

(Operator Instructions). Jeff Hershey, Colombia Management.

Just following up on that last question, how long do you anticipate the drag in China to last?

Let me provide an update at our next earnings call release. The timeframe is undefined at this point in time. We are trying to resolve that in the current fourth quarter. We don't have a specific answer yet.

Okay. Maybe, then, you could provide some commentary on some of the capital projects that you are working on, and what you expect they would contribute going forward?

If we look at the projects that we have recently just completed, one of the largest ones is the expansion of our polyol business in Germany. We added a second reactor and recently added additional infrastructure surrounding that reactor to support our growth in Europe.

If we take a look at our base German business today, we said our polyol business was up 29%. Most of that growth is coming from our German facility -- some incremental progress at our Polish facility, but most of that is coming from Germany.

So we anticipate, as the market has moved from buying urethane systems to self-formulation, that once those customers go, we think there's an opportunity that they will continue to stay with us. And that niche, particularly in the metal panel market, is growing nicely for us. So that's a recent example of a significant capital expenditure that is benefiting us as we go forward.

Certainly, we have built the neutralizer associated with our Surfactants business that has allowed us to sell more value-added products down into the Brazilian market. So that plant is currently up and running at full capacity and has contributed to our performance growth in Latin America.

We will look to make additional investments in Latin America to support the projected growth that we see in that market, both from a consumer product perspective, and as the market moves, particularly in laundry products, from laundry bars to powders to liquids; but also the agricultural and the oil field markets that we see continuing to grow in that region of the world. So those are two examples.

Thanks very much.

Jason Rodgers, Great Lakes Review.

It is Greg again. Now that the Bayer has been on board for a while, just wonder what your thoughts are on any acquisition pipeline that you may see out there and any opportunities.

We will continue to look at opportunities, particularly in our two core markets -- both surfactants and polyester polyols. So our focus is pretty narrow. We're looking at surfactants. Geographical expansion is something that we're continuing to look at and evaluate in a number of different regions in the world.

There are assets that are available today. Whether or not we choose to do one or more remains to be seen, but we will continue to look at bolt-on acquisitions as a core part of how we want to grow the business.

Within the Polymers space, we will continue to look at polyol acquisitions that are focused either in the CASE or the lamination or PUSH marketplaces. But right now our priority is to digest the Columbus acquisition we have and expand the capabilities of that site. And we're excited about the opportunity to do that.

Okay. And your tax rate -- should that remain relatively around 31% or so for the fourth quarter? And any early indication of what you expect for 2014?

Well, full-year, Greg, we are at 28% now; and I think that's a good metric to use for the full year of 2013. Then for 2014, I think we can expect it to be between, say, 29% and 31%. We expect it to be up slightly next year.

As we continue to sell more products from Singapore, somewhat offset by the acquisition of Columbus -- the Georgia facility.

Yes, because there's some shift of some income coming back to the US, Greg, with the Columbus acquisition. With that being the highest tax rate, that is how you can think of the rate trending back up slightly for next year.

Okay. And then I am somewhat intrigued by the commentary about the deformulation that is continuing. Just wonder if you could provide a little more color around that -- if you expect that to continue; what kind of impact that may have on your volumes, plus or minus, if it were to change at some point.

I think most of the deformulation impact is behind us. But as we look at trying to discuss year-over-year performance, it is a factor in our business today.

But I think as we look at our customer base, most of them have said that they are done with that activity at this point in time. They will always be looking at reformulating/deformulating. But at this point in time, we appear to have reached a steady state.

But customers in the laundry market, particularly in North America, do consider -- continually look at trading down from premium products to more value products. And that shift, as well, effectively is a deformulation as well.

Okay. And on the debt side, you had the $100 million private placement in late June. Is there anything else that will be done there in terms of debt refinance? And I just wonder what your overall interest rate is on all the debt currently.

Our overall rate, Greg, I think it is 3.8%-something blended. It may be a little bit higher than that. I think that was the rate of the current -- the most recent.

But we are pretty -- we can get back to you with the exact weighted average cost of our debt today. But it is probably in the 4.5% range, I would guess off the top of my head. We have looked at refinancing that, and currently it's really not economical to do that, based on some of the rates that we have outstanding and the prepayment penalties associated with that.

So virtually all of our debt today is fixed rate today. We are effectively not in our revolver, our $125-million revolver.

Okay.

We can get back to you. And it's actually in the published documents.

Yes. So I just would run the weighted average on our debt footnote. I think Quinn's point that he made about the fixed rate -- we feel really good about where we are from the debt perspective, and where our rates are locked in at; how these things are laid out into the future. We feel very good and confident as we look at the future in terms of paybacks, as well.

Okay. And I heard some discussion about the inventory, but nothing on receivables. Just wonder if you either had a balance -- the number there as of September 30; and/or what the days look like; or what you may be seeing in terms of customer payments.

Yes, sure. The receivables is $293 million, and that's the difference from about $256 million last year, same time. So that is up less than $30 million. Some of that is -- and there are two main pieces. Some of that the growth of the business related to Columbus, and some of that is also the volume that we have experienced in the total Company.

So there is no change as far as our terms are concerned. We feel, again, really good about our risk profile, as well. And there has been no significant change to terms or the risk profile in terms of bad debts, or anything like that. So it's growth related to volume and some from the acquisition.

And one last one for you. Out of the cash that you have, how much is in the States versus outside of the US?

We can go back and look. Virtually all of it is in the United States.

Okay. All right, thank you.

So the money that we have overseas, we're spending.

Okay.

And we're using a tax holding company in Canada to facilitate that.

All right, thank you.

There are no further questions on the lines at this time. I will turn the presentation back to you.

I would like to thank everyone for joining Scott and I on the call today, as well as the entire Stepan team for their continued dedication to serving our customers worldwide and their valuable contributions that allow us to generate value for you, our shareholders.

We look forward to reporting back to you all on our fourth-quarter and full-year 2013 results call. 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.