Stepan Co (SCL) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Stepan Company's first-quarter 2015 results 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, April 29, 2015.

It is now my pleasure to turn the conference over to Mr. Scott Beamer, Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Alan. Good morning, and thank you for joining Stepan Company's first-quarter 2015 financial review. 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 economic conditions, and factors detailed in our Securities and Exchange Commission filings.

Whether you are joining us online or over the phone, we encourage you to review the investors slide presentation which we have made available at www.Stepan.com under the Investor Relations section of our website. We make these slides available at approximately the same time as the earnings release is issued. We hope that you find the information and perspectives helpful.

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

Thank you, Scott, and thank you all for joining us this morning.

Coming into this year, we stated our belief that the Company was well positioned to reestablish earnings momentum in 2015. Yesterday, we announced first-quarter earnings that were on track with that expectation.

Net income was $21.3 million, or $0.93 per diluted share versus $0.57 per diluted share last year. Adjusted net income was $20.4 million compared to $12.8 million in the year-ago quarter. Net sales decreased 4% to $460.5 million on 2% higher volume.

Surfactant operating income was a record $33.8 million, up $15.4 million, or 84%, versus 2014. All regions increased earnings from the prior-year quarter. Improved operations, particularly in North America, drove the rebound in earnings. Higher sulfonation and software volumes in European laundry and higher sulfonation products in Latin America contributed to positive results. The quarter also benefited from greater sales to our distributor partners, an enhanced oil recovery pilot, and lower petroleum-based raw material costs.

Polymer operating income was $14.8 million, including a $2.9 million gain on the system business sale. Excluding the gain, polymer operating income was up 10% versus 2014.

Rigid polyol volumes continued to benefit from energy conservation efforts, and margins increased from falling petroleum-based raw materials. Income on phthalic anhydride sold to the merchant market in the quarter was down due to seasonally high petroleum-based raw material inventories, as petroleum-based products and specifically orthoxylene declined rapidly in price.

Specialty product operating income was $2.2 million, down $1.8 million from 2014 due to lower volumes and margins for lipid nutrition.

Our Board of Directors declared a quarterly cash dividend on Stepan's common stock of $0.18 per share payable on June 12, 2015. In the fourth quarter of 2014, we increased our quarterly dividend by $0.01 per share, which marked the 47th consecutive year of paying increased dividends to Stepan shareholders.

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

Thank you, Quinn. My comments will generally follow the slide presentation.

On slide number 3, we have provided a few headlines about the quarter, and we start by listing the items which are removed from reported net income in order to speak about adjusted net income. Each item is worth mentioning, but we believe that by adjusting for these items, it allows us to focus our discussion on the items which truly impacted operations. Since adjusted net income is a non-GAAP measure, naturally we provide a full reconciliation to reported net income which can be found in appendix number 2 of this presentation as well as in table 2 of the press release.

On a reported basis, net income was $21.3 million, or $0.93 per diluted share, while adjusted net income was $20.4 million, or $0.90 per diluted share. The following items account for that difference. We recorded a one-time after-tax gain of $1.8 million, or $0.08 per share, from the divestiture of our specialty polyurethane systems business. This business was non-core to our polymer segment, and we announced this transaction in January.

Deferred compensation expense was $600,000, or $0.03 per share. Naturally, all employee compensation expense is reflected in our normal operating income. However, we also allow our employees to defer -- the opportunity to defer some of their current payouts until a future date and the future payment changes based on the Company's share price when the stock price rises and expense is incurred. Since this liability only changes consistent with changes in the share price, we exclude this item from our operational discussion.

The first quarter also contained $300,000 of expense, or $0.02 per share, for an increase in the reserve for our previously recognized environmental expense. This was associated with our Maywood, New Jersey, site. Excluding these non-recurring items and deferred compensation expense, adjusted net income for the quarter was $20.4 million, or $0.90 a share previously mentioned.

Surfactant had record operating income, while polymers continued to perform well. I will examine each segment in more detail on the subsequent slides.

Slide number 4 provides the total Company earnings bridge for the first quarter compared to last year's first quarter and breaks down the $7.6 million increase in adjusted net income. Surfactants volume was up 2%. Strong volume growth outside of North America was partially offset by lower North American laundry volumes, which we previously communicated. Surfactant margins benefited from an improved product mix, particularly with stronger sales through our distribution partners, an enhanced oil recovery pilot, and growing volumes of our environmentally advantaged solvent in the agricultural market.

Margins were higher from operational improvements and falling raw material costs in all regions.

The improved operations figure of $3.7 million -- and it relates directly to two lines which are on the first-quarter 2014 earnings bridge. At that time, we noticed that we had additional costs related to very difficult winter weather, and that we had an unexpected plant shutdown in Anaheim, California. Since then, we have mentioned that our 2014 investments in both OpEx and CapEx would bring future benefit, and that was the case this quarter, as those types of costs did not recur through this -- though with this year's winter weather was also difficult.

Polymer operating income was also up, which we will review more details coming up shortly. Specialty products, as mentioned, income fell, impacted by lower volumes in the lipid nutrition business.

Incentive-based comp is higher compared to our accrual in the first quarter of 2014, as we ended up not paying bonuses for 2014 performance.

The effective tax rate was 30% compared to 28% in the first quarter last year. This is primarily because we generated a higher percentage of our earnings in the US, where our effective tax rate is generally higher.

Slide number 5 focuses solely on surfactants, which recorded $33.8 million of operating income, a record for any quarter in this segment. North American margins benefited from operational efficiencies, improved mix, as previously noted, and lower raw material costs. Volumes in North American consumer products have stabilized except for the impact of the lost laundry business, which we have discussed in previous quarters. The investments we made to improve operations drove a $5.9 million earnings improvement for this segment.

Earnings from our foreign operations improved by $6.6 million despite a $2.3 million headwind from foreign currency translation with the strong US dollar. So improved operations, improved mix, and falling raw material costs all contributed to this increase from the foreign operations.

Polymers made $14.8 million for the quarter. Excluding the divestiture of the polyurethane systems business, operating income for this segment was $11.9 million, which is a 10% increase from the prior quarter -- prior-year quarter. Net sales for the quarter dropped $9.7 million, or 8%. Foreign currency negatively impacted net sales by $7.8 million, while sales volume for this segment rose 5%.

North America, excluding the phthalic anhydride business, improved by $2.1 million, primarily from higher insulation standards. Europe improved by $700,000 before the negative impact of foreign currencies. This was driven by higher insulation standards and conversions to metal panels, which is the same technology as our roofing application except that it is used in walls. Raw material costs were also lower.

Phthalic anhydride sold into our merchant market was negatively impacted by margin pressure on our orthoxylene inventory position. Specifically, we purchased additional inventory prior to year end to protect against a key waterway freezing. First-quarter earnings were pressured downward as we worked off that higher-priced inventory during the quarter as the spot prices fell.

Slide number 7 provides the same material that we presented last quarter and shows that we are delivering additional earnings from the items noted. The points on slide 8 list some additional expectations which will be important to growing earnings. Quinn will speak to those points in his closing comments.

Next, I will come in on slide 10, which is appendix 1. Capital expenditures for the first quarter were $28.3 million versus $20.5 million in the prior-year quarter. For 2015 as a whole, we continue to expect spending between $120 million and $140 million as we further invest in China, Poland, and Brazil. China and Brazil where the specific reasons for the increase in the quarter, the $20 million versus the $28 million as mentioned.

I mentioned earlier the reason why the effective tax rate for the first quarter was higher by 2 percentage points. For the full year, we continue to expect our effective tax rate to be between 28% and 32% for all of 2015. As our US earnings grow, the overall tax rate would increase relative to the prior year.

Now referencing some balance sheet information which is shown on the press release, total debt was $284 million at the end of the quarter. This is slightly higher when compared to total debt at year end of $274 million. Our net debt ratio, which considers cash on hand, however, remained constant at 26%. There was no change to the underlying fundamentals of any component of working capital.

Now Quinn would like to make some comments on expectations for 2015.

Thank you, Scott. On our last call, we reviewed the short-term actions taken to improve profitability and our expectations for 2015. Overall, income from short-term deliverables is on track with our internal plans. Today, we are updating our additional expectations on slide 8.

In 2015, polymers should grow from continued energy conservation efforts throughout the world and the introduction of new specialty CASE resins and polyols. North American polymer income should benefit from growing volumes in rigid and CASE polyols. It appears polyol volume gains in Europe may be offset by lower margins and the impact of a strong US dollar. Profitability on polyols in China will be down as we begin to staff midyear for the plant startup in the first quarter of 2016. Additional specialty polyol capacity is planned for Poland and the United States. Our merchant market phthalic anhydride business should improve.

Overall, surfactant earnings should benefit from reduced operating costs due to the investments made in our efficiency program and in our plans to improve reliability and performance in 2014.

Globally, agricultural chemicals will provide income growth on an improved mix, with higher environmentally advantaged solvent volumes and lower operating costs. Income from oil fields, including enhanced oil recovery will decrease, as the current oil price is below that which is necessary to implement new commercial projects. Ore pilot and one commercial flood are projected to continue.

We expect income gains in North America and Latin America from consumer products, which includes laundry, personal care, and HI&I. Underutilization of North American anionic capacity remains an opportunity and a vulnerability, which will be addressed in 2015. Investments made to improve reliability should continue throughout the year, and benefits from the drive initiative should increase as the year progresses.

The Company's negative foreign exchange exposure from the strengthening US dollar is projected to increase slightly. The benefits of lower petroleum-based raw materials should continue, albeit less than the first quarter due to competitive activity.

We have a healthy balance sheet, and we will continue to pursue investments that improve our efficiency, increase utilization of our assets, accelerate growth, and deliver value to you, our shareholders.

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

Thank you. (Operator Instructions). Eugene Fedotoff, KeyBanc Capital Markets.

Congratulations on a strong start to the year. I was wondering if you can provide a little bit more color on your comments about plans to address underutilized capacity in North America in the surfactants.

Well, there are two ways to address underutilization of capacity. One is to get some new business, and the other is to rationalize capacity. I would tell you today we have chosen not to rationalize capacity. But we are simultaneously working on both options.

I see. And do you expect this new business to be at approximately average margins, or you think that is going to be a negative impact on margin?

I don't have any additional comments to make at this time.

Got it. Then surfactants volumes were stronger than I expected, especially given the loss of the customer in North America. Could you talk a little bit about demand improvements or trends you are seeing in international markets and domestically, particularly in the ag business?

We did experience strong global growth, as I mentioned in the script. Specifically in terms of our consumer products business in Europe did well, both in the anionic and the fabric softener areas. So I see those are a combination of, I would say, minimal market growth with a little bit of share gain in the European market and significant growth in the LatAm market, again, in the laundry space.

From an agricultural perspective, I think it is going to be -- we will see an improved year from 2014, but we are not going to see the demand fully come back to where it was in 2013. So it will be somewhere in between. So a nice improvement versus 2014 but not as high as it had been historically. And that comment in ag is a global comment.

Our business continues to benefit from an improved product mix. We are selling higher quantities of the environmentally preferred agricultural solvent, and companies are looking at replacing petroleum-based solvents in that segment, and our business is benefiting from that.

Got it. And then a question on the raw material benefit in the quarter. If I look at slide 5, the impact on operating income for surfactants, it seems like improved operations benefited operating income by $5.9 million. What was mix improvement and what was the impact of lower raw material cost? Thank you.

It is a complicated question. Let me kind of walk through some of the factors that impact that. The numbers that you are seeing here are in US dollars. So, relative to the unit margins, it is impacted by the foreign exchange obviously. From a Company perspective, that number is approximately $5 million negative impact on our gross profit relative to the foreign exchange. We also have a FIFO expense that is kind of working its way through those numbers as well. So there is a $1 million impact, approximately a $1 million impact, from our FIFO expense due to the falling raw material costs. And then there is -- the remainder of that is a mix impact versus improving raw materials. I would say the majority of the benefit is coming from a mix improvement rather than falling raw material costs, particularly within our surfactant business.

Raw material benefit is not as big as you might think in the first quarter.

Jason Rodgers, Great Lakes Review.

Following up on the last question about the mix benefit in surfactants, if you believe that is sustainable going forward?

First of all, let me say that, generally speaking, historically our first quarter is generally our strongest quarter. And the first quarter typically benefits from a strong ag volume as well. So there were benefits in terms of mix, in terms of a greater percent of agricultural sales. And then we did have a shipment for an oil -- enhanced oil recovery pilot which benefited the first quarter. So I think there are elements to that mix that are sustainable going forward, but generally the first quarter is better than subsequent quarters.

Okay. And then looking at the slides, the expected benefit of $0.75 for 2015, how much of that was realized in the first quarter, and how do you see the remainder of the savings spread out over 2015?

Jason, we -- at the last call, we said, broad strokes, you could take that $0.75 and spread it fairly evenly because there were a number of things we had been working on throughout the prior year. I would say that is still the case, although we expect some improvement as the year progresses and we enhance our improvement on the objectives as well.

I will jump in a little bit and comment on that. Obviously, we are not going to have a repeat of the urethane system (technical difficulty). And the weather impact was more pronounced in the first quarter versus the second, third, and fourth quarters last year. So I think what Scott is saying as well is that we are anticipating that some of the other benefits will start to kick in to cover the gains, if you will, that we are not going to have relative to the system sale and the weather in the subsequent quarters.

That's right. I was speaking more specifically to the items that are full year, the efficiency program, the restructuring items, and so on. There are a couple here, as noted, that are specific to a quarter. We gave the details on the volume and mix, for example, in the urethane system divestiture and so on. So, yes, good point. I was speaking other than those items where we specified a quarter.

Okay. And then when you talked about the environmentally advantaged solvent, I wondered if you could talk more about that product, what advantages it has, and if you have competition for that in the market.

We do have competition in the market for that market. So it is -- our [halcomit] product line, which is a DNA amit which is being used today to replace petroleum-based solvents, particularly in the agricultural market. So volumes are meaningful today, and the product line is positioned to grow based on new customer adoptions that we anticipate over the next one to four years, I would say.

Okay. And then finally, looking at the specialty business, what were volumes off year over year in the quarter?

Volumes -- it is low single digits, Jason. And there's a couple of pieces, a smaller part of our Company. There's a couple of pieces in there. The lipids business volumes are down sort of low single digits. And there's a few pieces that we have some more I would characterize as more specialty tolling sort of arrangements that were stable.

The volume is relatively insignificant in terms of the overall Company performance in terms of when it is down. These are relatively high-margin items. Specifically at one customer, we are projecting for the year that volumes are going to be down 20% to 30%. There is a high sales dollar associated with the sale of those products and the loss of that specific volume, again, down 20% to 30% for the year will have an impact to the business.

Significantly, though, in terms of loss profitability of that business, we have seen the margins on our median change triglyceride business fall 20% to 30% as well. It was a combination of lower volumes of a high-margin, very high-margin specialty combined with falling MCT margins.

That's it for me. Thank you.

(Operator Instructions). Mike Harrison, Global Hunter Securities.

Quinn, I was hoping you could address the raw material situation in a little more detail. It sounds like we probably have seen the greatest benefit during Q1, and we should expect it to tail off as we see competitors respond. But then you also mentioned that in PA you had some issues around inventory that you needed to work down -- high-cost inventory that you needed to work down. And so the raw material situation there should be improving. So can you just help kind of reconcile those two issues?

Let me just address PA because I think that is a little bit more straightforward. So, yes, we did have high-priced inventory that we worked off. So we would anticipate, more or less, a $1 million to $1.5 million swing in the PA results per quarter, or at least for the second and the third quarter of this year versus our first-quarter results as a result of having worked off the negative high-priced inventory of [salatin hydrite].

Generally speaking, volumes turned down in the fourth quarter, so I would anticipate minimal improvement relative to the fourth quarter versus the first quarter. For the second and third quarter, I would anticipate at least a $1 million gain per quarter for that based on the swings in raw material costs.

For the other products within our portfolio, we believe that the gain will shrink as the year progresses, somewhat offset by the -- we would anticipate we would get some LIFO income -- net LIFO income versus expense. So it will be partly offset by LIFO income as the year progresses. But we would anticipate that the advantage of the lower petroleum prices will shrink as the year goes on.

All right. And then the China polyols plant that you are bringing onstream, it sounds like the costs start to come in during the second half of the year. When do the revenues come in? And is there a fairly lengthy qualification process, or do commercial sales commence as soon as you are satisfied with the quality of the material?

We are going through customer approvals based on products that are being shipped from other sites today, US sites and other tollers within China. So we will have base product approvals today and hope to gain more as the year progresses. We will have to get the plant approved. Because it is only a plant approval, we believe that approval will be relatively quick in China. We are anticipating starting to manufacture projects kind of late in Q1 of 2016, and we would hope that by midyear we would have -- be supporting all of our business in China from China.

All right. And then (multiple speakers) -- sorry. Go ahead.

Midyear 2016.

Right. And then I was also hoping that we can get an update on the Brazil sulfonation facility that you are acquiring. I know that's been pushed out. Any update on the timing around that and exactly what we are waiting for?

We believe that should occur at the end of May at this point in time. The latest was a local government approval that needed to occur for -- enable for Procter & Gamble to transfer the land on which the plant sits to us. It was the final government approval. We have received that at this point in time. So we don't believe there are any other barriers in terms of us closing that transaction. So at this point, we believe it will occur at the end of May.

All right. Thank you very much.

Eugene Fedotoff, KeyBanc Capital Markets.

Thanks. A couple of follow-ups. First, I guess, on the last conference call, you talked about currency being negative or your expectations for that currency will negatively impact operating income by $5 million in 2015. Obviously, it looks like first-quarter impact was around $3 million. Do you have an updated number?

Yes. The updated number that we would have today is between $8 million and $10 million. The dollar has continued to strengthen since the initial projection. And, quite frankly, our foreign income is also up. So it is a combination of those two issues that we would say that the FX impact would be in the higher $8 million to $10 million range today.

Got it. And then a question on corporate expenses. Should we expect that -- first-quarter expenses went up a little bit year over year. Should we expect corporate expense to come back to the sort of 2013 level in 2015?

I think, Eugene, there are a couple of primary drivers. We are paying for some consulting fees. We mentioned in the release about some patent and trademark activity that was up. So we are going -- so let's take each point, maybe.

The consulting fees, for now, I would model in the same sort of run rate potentially.

In the consulting fees, we said we have been using an external resource to help us with our efficiency program. There is a gain share element to that and so you may see that number go up as a year goes on. And if so, that could be a good thing for the Company as we talk about winning at other lines within our business.

Because the benefits are going to be in other places of the income statement, so we wouldn't net it out there. So the expense piece may look (inaudible) that's not going to be the place that we would direct someone to try to get the impact.

We mentioned the incentive-based compensation. Okay, so we talked about the consulting. The incentive-based compensation, that is going to continue to essentially run unfavorable as we ended up not paying bonuses for the 2014 performance. So that is going to be a headwind going forward. And then we had a small environmental adjustment that we called out in the press release for the quarter that we wouldn't expect to continue. And the baseline spending we expect to be flat to prior year essentially.

So overall, do you expect that to go up to as high as (multiple speakers).

Yes, the short answer is higher because of those, the first two items that I mentioned.

So probably back to that $50 million level, you would say?

I would say at a minimum level, yes. Because of the gain share component of our consulting agreement, we would hope that number would go up, quite frankly.

Got it. Thank you.

Mr. Stepan, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

How about closing remarks? Thank you. I would like to thank everyone for joining Scott and me on the call today. We look forward to reporting continued progress to you on our second-quarter 2015 call. Thank you very much, and have a great day.

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. Have a great day, everyone.