Stepan Company (SCL) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter and Full End 2011 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 15, 2012. I will now turn the call over to James Hurlbutt, Vice President and Chief Financial Officer. Please go ahead, sir.

Good afternoon. And thank you for joining the Stepan Company’s fourth quarter and full year 2011 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 Quinn Stepan Jr., President and Chief Executive Officer of Stepan Company.

Thank you, Jim, and thank you all for joining us today. I’m pleased to report that Stepan delivered our fourth quarter consecutive year of record net income, our 44th consecutive annual dividend increase and another year of appreciation in our stock price. At Stepan we are focused on delivering value to you, our shareholders. In 2011, net income was $72 million, up 10% from 2010. Excluding deferred compensation, net income was $72.9 million, up 8% over 2010. Results were driven by higher Functional surfactant and polyol sales. Utilizing our strong balance sheet we made progress expanding our footprint into markets that are growing rapidly with new capacities for Brazil sulfates, German polyols and soon Singapore methyl esters. Methyl esters are a key building block for Stepan’s higher margin amphoteric business. Singapore production should allow us to globalize our methyl ester derivative business. We continue to pursue greater innovation and invention within the company. Although commercialization is lower than anticipated, we are enthusiastic about opportunities for enhanced oil recovery surfactants and derivatives we are developing from unique metathesis feedstocks. At this point, I would like Jim to walk through Stepan’s fourth quarter and full year results.

Thanks, Quinn. Starting with the topline, total net sales for the fourth quarter were approximately $444 million, up 23% versus the year ago quarter. Full year 2011 net sales rose 29% to $1.84 billion, rise in fourth quarter sales were primarily related to higher selling prices which accounted for 19 percentage points of growth and increase volume, which accounted for 5 percentage points of the growth. Foreign exchange translation contributed a 1 percentage point decline in fourth quarter sales. Overall, volume rose 5% in the fourth quarter, with volume rising 3% for the full year. Net income attributable to Stepan Company on the GAAP basis for the fourth quarter totaled $13.2 million, up 55% from the prior year. GAAP EPS was $1.17 per diluted share, up 54% versus the year ago quarter. Full year GAAP net income rose 10% to a record high $72 million, our fourth consecutive year of record earnings, resulting in fully diluted GAAP EPS for 2011 of $6.42, up 9% year-over-year. The impact of deferred compensation reduced GAAP diluted earnings per share by $0.19 in the fourth quarter and $0.08 for the full year. Fourth quarter non-GAAP net income which excludes approximately $2.2 million on pretax deferred compensation income increased 35% to $15.4 million versus the year ago quarter. Non-GAAP EPS was $1.36 per diluted share, up 33%. 2011 full year non-GAAP net income rose 8% to $72.9 million with non-GAAP EPS up 7% year-over-year to $6.50 per diluted share. A detailed table outlining the financial effect of the deferred compensation plan has been provided in the earnings release as table two for your reference. Fourth quarter 2011 other expense rose versus the year ago quarter with the income -- increase comprised of higher interest expense and higher expenses associated with equity joint ventures. Also please…

[indiscernible} to accelerate growth over the last two years have created the opportunity for increased earnings in 2012. Surfactant growth will come from our expanded operations in Brazil, startup of our new plant in Singapore and greater sales -- greater global sales of higher value Functional surfactants used in the agricultural, oilfield and enhanced oil recovery markets. Our polyol volume is projected to grow in 2012 as recommendations to use higher insulation levels to reduce energy consumption are implemented throughout the world. The German polyol plant is up and running. Our polyols, again as Jim said, are primarily used in replacement roofs versus new construction. Our specialty product business is positioned for growth in 2012 based on last year’s Lipid Nutrition product line acquisition. Overall, we are enthusiastic about the opportunities we have to grow in 2012. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Benjamin, please review the instructions for the question portion of today’s call.

Thank you. [Operator Instructions] Our first question comes from the line of Jason Rogers with Great Lakes Review. Please proceed with your question.

Looking at some of the balance sheet items, I don’t know if you mentioned them, but the receivables and accounts payable?

Yeah. Did we lose Jason?

No. I’m here. Accounts receivables.

Okay.

You’d just like us to comment on the receivables.

If you gave a figure out for the receivables and the payables.

Oh! Just the actual amount?

Right. Exactly.

Okay. So, we ended the year with receivables at $260.2 million and inventories of $110.4, which is net of our LIFO reserve and then, I assume you want payables as well, which is $135.6 million.

Okay. And looking at the North American surfactant market, some of the weakness there? Is that due to customers using less active ingredients and are you seeing any, if that’s the case, any reversal of that currently?

Yeah. I think due to a higher commodity prices throughout 2011, we did see consumer product companies reformulate and de-formulate their commodity range products in the laundry and the dish categories. So at this point in time, we are not anticipating that people will go back and increase their active levels and their products at this point.

Okay. And what were the costs related to the fire for the quarter…

Fire, German…

… German plant?

If we take a look at it, there is cost associated with the rebuild that we believe will be covered by insurance. The order of magnitude that was about €1.8 million and then if we look at kind of the business interruption claim, it will probably be somewhere in the €1.5 million to €2.5 million range.

Okay. And looking at the tax rate, what do you expect for 2012?

Roughly 32.

Okay.

Should be able to hang on to a good portion of the savings that we built into the tax rate in the past 12 months due to a tax restructuring we did in late 2010.

[Operator Instructions] Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.

Good. I got a question on in terms of polyol volumes, looks like they grew 13% in 2010 and 14% in 2011. How should we think about that in 2012, do you think that they can keep this pace or do you think it will moderate a bit?

Overall, I would say that we’re in a comparable range, it maybe down slightly as we look at 2012 in part, because we’re coming off of a higher base. But we do anticipate to be significant growth in the marketplace.

Okay. And then in terms of based on how much raw materials increased in 2011. How much of that were you able to offset with price and is there -- do you expect that maybe you will be able to recover all raw material cost increases in 2012 through price?

Yeah. If we take a look at, we run our business and we focus a lot on our unit margin on a per pound basis and as we look at kind of 2010 going to 2011, our actual unit margin was actually up a little bit. Now gross profit percent is down because of the high rapid inflation that we had, but we anticipate that our unit margins from 2011, 2012 will be flat. So therefore we believe we can cover the price increases that we have in the marketplace.

And we have a follow-up question from the line of Jason Rogers, Great Lake Review. Please proceed with your question.

Just looking at the enhanced oil recovery area, I know you mentioned it’s going a little slow than anticipated. But I wondered if you could talk a little bit about any new developments there, as well as what your expectations are for profitability of that business for 2012? Thanks.

Okay. Yeah. I guess we’re very encouraged by the results of the pilots that we’re currently involved in. The lag that we’re seeing in terms of the financial impact for Stepan Company is because our customers are taking a fair amount of time to implement the capital projects in their fields. And so, but we’re very encouraged by the results, again the pilots that we are in. In 2012, we believe that the business will be marginally profitable, more or less at a breakeven level. And then we’re anticipating income growth in 2013 and ‘14 based on the scale ups of the various projects that we’re involved in.

[Operator Instructions] I will now turn the call back over to management. There are no further questions at this time.

Okay. I’d like to thank everyone for joining Jim and I on the call today. We look forward to reporting our first quarter 2012 results on our next call. Thank you for your interest in our company. And have a good 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.