Stepan Co (SCL) 2013 Q4 法說會逐字稿

Ladies and Gentlemen thank you for standing by and welcome to the Stepan Company's fourth quarter and full year 2013 earnings call.

(Operator Instructions)

As a reminder this conference is being recorded Wednesday, February 19, 2014. I would now like to turn the conference over to Scott Beamer, Vice President and CFO. Please go ahead, sir.

Thanks, Mike. Good afternoon and thanks everyone for joining us today for Stepan's fourth quarter and full year 2013 earnings conference call.

Before I begin I'd like to make mention that the conference call contains some 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 companies Securities and Exchange Commissions filings.

With that being said, now I'd 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. The fourth quarter and full year 2013 net income was disappointing to us despite being the second best year in Company history. Net income was $10.7 million in the quarter and $72.8 million for the full year. Earnings, excluding deferred compensation and restructuring expenses, were $14.3 million and $77.3 million, respectively. Full year earnings from operations were down 8.8%.

Net sales were $1.9 billion, up 4%, as all three operating segments delivered improved sales. Recent large investments in both Surfactants and Polymers contributed to our profitability in 2013 and should deliver income gains in the fourth quarter -- should deliver income gains in 2014. The fourth quarter was highlighted by net sales growth of 11% with strong volume growth within our Ace business and our strategic initiatives in Brazil, Singapore, and Columbus.

The fourth quarter and year were not without challenges as net income declined due to higher raw material, maintenance, and transportation cost. Despite these challenges in 2013, we remain optimistic about our future and our ability to deliver growth.

In the fourth quarter, the Company approved a plan to consolidate a portion of its North American Surfactant manufacturing operations to reduce future costs and improve asset utilization. Specifically, we shutdown sulfonation production at our Canadian manufacturing site which will result in the elimination of an estimated 20 positions. Production of effected products currently manufactured in Canada will be moved to US plants. The restructuring actions are expected to be completed in the third quarter of 2014.

Additionally, the Company reduced the useful life of the manufacturing assets in the affected areas of the Canadian plant. This change will add about $1.8 million of depreciation expense in the first half of 2014. The savings are expected to begin in the second half of 2014 with an annual run rate of approximately $2.5 million per year beginning in 2015.

Overall, our balance sheet remains strong and we intend to make additional investments that will improve our efficiency, drive our earnings growth, and deliver value to our shareholders. Our Board of Directors declared a quarterly cash dividend on its common stock of $0.17 per share payable on March 14, 2014. In 2013 Stepan paid out total cash dividend distributions of $14.5 million, and in the fourth quarter, increased its quarterly cash dividend by 6% marking the 46th consecutive year of paying increased dividend. At this point, I would like Scott to walk through Stepan's fourth quarter and full year results.

Thanks, Quinn. Total net sales for the fourth quarter were $474.3 million which was up 11% versus prior year, due to higher volumes across all the businesses. Selling prices were flat versus the prior year. For the full year, net sales were $1.88 billion, up 4% versus prior year; volumes were up 7% while selling prices decreased by 3%.

Since deferred compensation expense is generally a non-operating item, which is driven by changes in our share price, we typically speak about net income excluding deferred compensation expense. Additionally, in the fourth quarter, we took a pre-tax restructuring charge for the items that Quinn mentioned of about $1 million pre-tax or $700,000 after-tax, so if we exclude both of those items we get a more comparable view.

Fourth quarter net income excluding deferred compensation expense and restructuring expense was $14.3 million versus $18 million in the prior year. A detailed table outlining the financial effect of the deferred compensation plan has been provided as normal in the earnings release as Table 2 for your reference.

With regard to the restructuring action approved in the fourth quarter, the $1 million pre-tax charges related to one-time severance expenses. Most of the severance payments are expected to be made in the third quarter of 2014. In addition to the restructuring costs, the Company reduced the useful life of the manufacturing assets in the affected areas, and recognized $300,000 of additional depreciation in fourth quarter cost of sales as required by the accounting rules. This change will add about $1.8 million of depreciation expense in the first half of 2014.

While the impact of foreign currency on our net income is negligible, we provide Table 3 in our earnings release which shows the summary of the effects of foreign currency translation on sales and key income statement line items.

Fourth quarter gross profit declined 13% versus prior year to $60.9 million and full year gross profit declined 3% to $281.7 million and we'll speak about more details of that when we get into the segment review. Fourth quarter operating expenses excluding deferred compensation expense declined by $1.5 million or 4%, primarily from the reduced performance based compensation expense related to our lower performance for the year. Full year operating expense, excluding deferred compensation, increased by $9.4 million or 6%. This increase is primarily from spending to drive strategic initiatives such as additional R&D resources, evaluating acquisitions, filing patents and trademarks, and external innovation cost.

Next, net interest expense for the quarter was $2.9 million, which reflects an increase of $638,000 versus last year. This is specifically due to the higher average debt levels, resulting from the private placement at a 3.86% rate which was used to fund the second quarter acquisition of the North American polyester resins business from Bayer Material Science.

The full year effective tax rate was 24% in 2013 compared to 31% in 2012. The decrease was partially attributable to a favorable IRS ruling published in the fourth quarter of 2013 that allowed the Company to exclude certain biodiesel excise credits from income and that was retroactive to January 1, 2010. That resulted in a large benefit that you've seen in the fourth quarter.

The decrease in the overall annual rate was also attributable to the Federal Research and Development Tax Credit, which was extended retroactively back to January 1, 2012 when the American Taxpayer Relief Act of 2012 was signed into law in 2013. So that entire effect was in 2013.

Also contributing to the effective tax rate decline was a greater percentage of consolidated income being earned outside the US where the effective tax rates are generally lower. Looking ahead to 2014, we project our ongoing tax rate to be between 28% and 30% which is just slightly changed from what we said in our third quarter conference call.

Now let's move to a review of the performance of our three key business segments. First, we'll look at Surfactants which is our largest segment and accounts for about 70% of our company sales. Net sales of Surfactants totaled $327.7 million for the quarter, an increase of 6% versus prior year. Full year Surfactant sales was 1% to $1.32 billion. Surfactant sales volumes increased 9% for the quarter and 6% for the full year.

All regions delivered growth for the full year. US consumer product and general Surfactant volumes were each up 2%. European consumer product volumes were up 3%. Higher value-added Surfactants used in agricultural products delivered strong volumes growth while Surfactants used in oil fields declined in 2013. Regionally, recent capacity expansions in Brazil and Singapore delivered anticipated growth.

Surfactant gross profit declined $10.9 million or 21% for the quarter and declined $17.7 million or 9% for the full year. North American operations were responsible for most of the quarterly and full year declines. For the quarter, North American results were negatively impacted by higher material cost, maintenance, and transportation cost.

On a full year basis, North America results were also negatively impacted by higher costs raw material inventory built to support our Singapore plant start up, and contractual timing differences between changes in raw material cost and selling price, and non-recurring costs to secure a strategic raw material for specialty Surfactant growth. All regions outside the US delivered higher gross profit for the full year.

Moving on to our Polymer segment which represents about 25% of our sales, net sales totaled $128.4 million, an increase of 25% from prior year. Full year Polymer sales increased 14% to $483.4 million, excluding the impact of the acquisition, Polymer sales increased 11% and 14% for the quarter and full year, respectively. Polymer sales volume increased 19% for the quarter and 80% for the full year. Excluding the acquisition from Bayer, the increases were 10% and 3%, respectively.

For the full year despite continued general economic headwinds, European polyol volumes grew by 16% in large part due to new business and market growth in metal panels and C.A.S. E. North America polyol, used in rigid foam installation, was flat. Phthalic anhydride sold into the merchant market experienced a volume decline of 6% while internal consumption increased, about 40% of total phthalic anhydride production is consumed internally.

Polymer gross profit increased $1.2 million or 7% for the quarter, and increased $9.0 million or 13% for the full year. The most significant driver was the strong volume growth in Europe and the Columbus, Georgia acquisition also contributed marginally to 2013 earnings as expected. In Quinn's outlook section he will comment on 2014 expectations for this acquisition. The positive margin improvements were partially offset by one-time costs related to the Chinese government mandated plant relocation.

Finally for Specialty Products, the segment which represents about 5% of our Company sales, here the sales increased 33% to $18.2 million for the quarter. Full year segment sales rose 8% to $80.3 million. Specialty Products gross profit increased 58% to $1.6 million for the quarter, driven by higher food and flavoring product sales volumes. Full year gross profit declined 1% to $300,000. Specialty Products volume increased 26% for the quarter and 2% for the year.

Now moving ahead to the balance sheet. Total debt was $270.6 million as of December 31, 2013, down $6.2 million essentially due to scheduled debt repayment. Total debt was up $88.2 million year-over-year, largely driven by the $100 million private placement completed in June to fund the second quarter acquisition which has been mentioned.

As of December 31, 2013 inventories totaled $172.4 million, an increase of 10.4 from prior year and the largest driver was an additional $7.3 million at the new Columbus, Georgia plant. We also report net debt which is total debt minus cash on hand. As shown in the earnings release that ratio of net debt to total capital was 19.9% on December 31 compared to 18% for the year -- for the prior year. Our total debt-to-capital ratio, total debt now, was 32.8% compared to 27.5%.

Capital expenditures were $92.9 million for the full year and looking forward we expect full year 2014 capital expenditures to be within the range of $115 million and $125 million, including capacity expansions in the US and Brazil. This increase is consistent with our general objective, to use cash from operations to fund investments for future growth.

Regarding cash flows, for the full year we generated $150.3 million in cash from operations compared to $109 million in the prior year. In the earnings release we have provided some additional transparency on some key working capital components. Net receivables inventories and accounts payable, generally changed consistently with the increased volumes in our business. There were no significant changes to terms.

We have a relatively small share repurchase program for the full year of 2013 we repurchased 42,000 common shares in the open market for a total of $2.3 million. We made no share repurchases in the fourth quarter.

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

Thank you, Scott. As we look to the full year 2014, we are experiencing a slow start to the year with severe weather impacting customer locations as well as our own facilities in North America. Even with this, 2014 income should rebound, as many of the events that held us back in 2013 are now behind us.

In particular, Surfactant earnings will be down in the first quarter mostly due to the extreme weather and higher maintenance expenses. Earnings will improve as the year progresses, driven by greater agricultural sales, continued consumer product growth in Brazil, projected demand in enhanced oil recovery, and gains from operational efficiencies. The Surfactant business will also benefit from the absence of approximately $9 million in non-reoccurring items including costs related to the Singapore plant start up, and securing a strategic raw material for specialty Surfactant growth.

Generally speaking, there should be minimal deterioration of base margins. 2013 margins, excluding one-time items, should serve as a good predictor of 2014 margins. Any deterioration in baseline margins could be mostly offset by expanded sales into the more profitable markets for functional Surfactants and C.A.S. E. polyols.

Polymers should experience continued growth from polyol used in energy saving rigid foam installation. Improving economies in the US and Europe, as well as further conversion of metal panel and C.A.S. E. customers, should contribute to volume growth in 2014. The North American polyester resin business acquired from Bayer is fully integrated and is positioned to deliver between $6 million and $8 million operating income in 2014.

The $2 million cost to close our Chinese joint venture plant and the establishment of an interim supply chain will not re-occur. We plan to build a new plant in China to participate in what we expect will become the largest polyol market in the world. Overall, the health of our balance sheet remains strong and will facilitate investments in growth and efficiency opportunities and that will deliver value to you, our shareholders.

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

Absolutely, thank you.

(Operator Instructions)

We have one question from the line of Daniel Rizzo with Sidoti & Company. Please proceed.

Good afternoon guys.

Hi, Dan.

Could you just provide a little color on specifically what the maintenance costs were that they were elevated last quarter and are kind of hampering things in the beginning of the first quarter here? Is that something that's, I don't know like a yearly maintenance thing or is that something that was unique to this time frame?

We've been spending a significant amount of money kind of on base maintenance capital of our facilities over the last several years and reinvesting in our core manufacturing operations. Although, we had planned to do some significant work in our Anaheim facility in mid 2014, we had some mechanical issues with our sulfur burner at our Anaheim facility that caused significant down time, higher maintenance costs in the fourth quarter, and significant outsourcing in terms of additional transportation cost from our Millsdale facility in the fourth quarter and has got into the first quarter of 2014 as well.

So that one specific item probably contributed at least to a $1.5 million of downturn in 2013 and is carried over a little bit into 2014 as well.

But should be gone by the end of the first quarter; correct?

It should be gone. We will probably experience -- the plant is up and running today, but we will go down for additional maintenance, planned scheduled maintenance, to replace the burner actually probably in the second quarter maybe early third quarter. So there will be some outsourcing cost, but mostly behind us in the first quarter.

Okay, and then you mentioned you did a capacity expansion in Brazil, I think, with surfactants. Is that complete? Do you have enough capacity there now? Because I think you had more demand than you can meet before. Is that still the case?

We're planning on adding a second neutralizer to our sit Vespasiano which is outside Belo Horizonte, Brazil. That's a significant capital project and that project itself will not be online until the end of the first quarter 2015. So we have opportunities to sell a little bit more incremental capacity down in the region until we expand that site.

Okay, thank you guys.

Thank you, Dan.

(Operator Instructions)

We have another question coming from the line of Jason Rogers with Great Lakes Review. Please proceed. Your line is now open.

Hi, good afternoon.

Hi, Jason.

Just wanted to get your thoughts on the oil markets for 2014 and what you're expecting out of the enhanced oil recovery business?

Yes, we continue to be optimistic about the enhanced oil recovery market, recognizing that some of the development activities have been much longer than we anticipated. And we are seeing some increased competition within our customer base for other opportunities, they may be seeing in the fracking market. But having said that, we are currently active in five to seven pilots and/or commercial floods in 2014. We're anticipating based on projects that have started, or committed to be started, that we will as the year unfolds improve our profitability $3 million to $5 million over 2013.

And then you mentioned the $1.5 million in maintenance costs for the Surfactant business. Is that in addition to the $9 million of costs that you flushed out as non-recurring or is that included in the $9 million?

That's in addition to.

And looking at that $9 million, how is that spread out over the last four quarters? Is it pretty much evenly spread or more concentrated in certain quarters?

Yes, I would say the first half of it was probably 50% -- or 70%, 70%, very little in the third quarter and then 30% in the Fourth Quarter.

Thank you very much.

And Mr. Beamer, there are no further questions at this time. I'll turn the call back over to you.

Okay. I'd 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 world wide. And their valuable contributions that allow us to generate value for you, our shareholders.

We look forward to reporting back to you on our first quarter 2014 results call. Have a great day, thank you.

And Ladies and Gentlemen that does conclude the Conference Call for today. We thank you for your participation and ask that you please disconnect your line.