Stepan Company (SCL) Q1 2012 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, April 25, 2012. I would now like to turn the conference over to Mr. Jim Hurlbutt, Vice President and Chief Financial Officer. Please go ahead.

Good afternoon. And thank you for joining the Stepan Company's first quarter 2012 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 Security[sic] (Securities) and Exchange Commission filings. That being said, I would now like to turn the call over to Quinn Stepan -- F. Quinn Stepan Jr., President and Chief Executive Officer of Stepan.

Thank you, Jim and thank you all for joining us today. We are off to a good start with net income up 19% versus last year and earnings excluding deferred compensation, effectively earnings from operations up 30% from last year. In the first quarter, our business benefited from the investments we have made over the last several years to extend our core technology platforms to emerging markets and to improve our product mix through innovation. We combined this strategy with the consistent focus on effectively managing commodity raw material costs and driving operating efficiencies across our global business. Our results in 2012 will depend on our ability to deliver volume growth, particularly from our new assets. In the first quarter we delivered surfactant volumes up 4% and polymer volumes up 7%. We plan to continue to deliver discipline growth and value for you our shareholders. At this point, I would like Jim to walk through Stepan’s first quarter results.

Thanks Quinn. I’ll start my review with the look at the top line. Total net sales for the first quarter were approximately $465 million, up 10% versus the year ago quarter. The rise in the first quarter sales were primarily related to higher selling prices, which accounted for 7 percentage points of growth and increased volume which accounted for 4 percentage points of growth. Foreign exchange translation contributed a one percentage point decline in first quarter sales. Net income attributable to Stepan Company on a GAAP basis for the first quarter totaled $22.3 million, up 19% from the prior year. GAAP EPS was $1.97 per diluted share, up 17% versus the year ago quarter. The impact of deferred compensation reduced GAAP diluted earnings per share by $0.12 in the first quarter of 2012. First quarter non-GAAP net income which excludes $1.3 million in deferred compensation expense increased 30% to $23.6 million versus the year ago quarter. This non-GAAP EPS was $2.09 per diluted share, up 28% 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 in key income line items. First quarter 2012 gross profit increased 24% year-over-year to a record $76.8 million. Selling price increased and improved sales mix, and higher overall sales volume drove the improvement. Turning to quarterly operating expenses, which rose $9.4 million or 30% versus the year ago quarter, deferred compensation plan expense accounted for $3.9 million of the increase, a higher level of selling and administrative expense primarily relate to investments made for future growth in Singapore and Brazil, coupled with…

Thanks Jim. I ended last quarter’s call by stating we were enthusiastic about the opportunities we had to grow. Our strong first quarter reaffirms our enthusiasm. All 3 segments delivered record first quarter profits. Our surfactant business experienced continued growth at higher value functional products used in the agricultural and oil field markets. Our expansion efforts in Brazil delivered solid earnings growth. The Singapore methyl ester plant will start shortly and begin shipping product during the second quarter. Polymer segment delivered a record first quarter on continued growth of polyol used in rigid foam insulation. Our polyol plant expansion in Germany is operational. We anticipate polyol volumes will remain strong for the balance of the year. Our North American PA polyol plant will complete its triennial shut down in the second quarter. We are pleased with the record profits of our specialty product segment delivered. The Lipid Nutrition product lines acquired last year are off to a good start. We look forward to further synergies with our historic business. We have the opportunity to build on our solid start and deliver significant surfactant earnings growth in 2012 as we continue to pursue long-term initiatives that deliver value to you, our shareholders. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Kayla, please review the instructions for the question portion of today’s call.

[Operator Instructions] Our first question comes from the line of Kevin Hocevar with North Coast Research.

I have a question on this -- the surfactant volume was --seemed strong here in the first quarter. Do you think that will be sustainable at those levels for the rest of the year and also could you kind of breakout consumer products versus functional. Of that 4% growth, how much was from consumer and the difference between that and the functional?

Short answer is yes. We believe our surfactant growth through the year is sustainable. Consumer products was essentially flat in North America. For the first quarter and for the year, I think we’re projecting minimal growth and consumer products in North America. Most of the growth is coming from our functional business and some benefit from the bio side -- biodiesel business we’re in as well. We are seeing large consumer growth in, as we said, Europe and in Latin America.

Okay. And it terms of TIORCO, it looks like that lost a little bit in this first quarter. And I think in last quarter’s call, you guys had thought that this would break even this year. Is that still your projection for the rest of the year, that it will break even?

So let me clarify. Kevin, this is Jim. You have to keep in mind, we still account for TIORCO as a joint venture. So what you are seeing on the press release line item is solely the expenses related to TIORCO. The profit on our sales into the enhanced oil recovery market are embedded in the surfactants segment results.

But I guess having said that, we are projecting that TIORCO, our enhanced oil recovery business will generate a loss in 2012. The timeframe for project implementation in the large volume and profit contribution will probably be in -- late 2013, ‘14. So we are investing in that business today. We are scaling that business to be successful long-term and -- but today based on that and just in time of the projects that we are currently involved in, we don’t anticipate any significant economic -- net economic benefit for the company in 2012 and minimal benefit in 2013.

Okay. And I guess sticking with the innovation side, could you give a little update on Elevance where that stands -- just kind of a brief update on Elevance?

For those, who aren’t familiar, Elevance is a company that is a start-up company that has exclusive license to natural oil derivatives of a technology called metathesis. They are leveraging a Nobel Prize-winning chemist, award winning catalyst technology to make feed stocks that we would use to make derivatives. Derivatives that we are looking at making are going to be used in our traditional surfactant markets for hard surface cleaning, laundry, agricultural, adjuvants and et cetera. So we are working through the process. We have identified 6 target molecules that we are planning on introducing to the marketplace in Q2 to Q3. We -- those molecules will not be registered until Elevance gets registrations on the feed stock again, so they are just in time for the technology, will be kind of 2013 or ‘14 in terms of market financial impact for the company. But we are very excited about some of the things that we have seen in terms what the technology could do. We’ll be introducing those to our customers in Q3 of this year and we’ll get a better feel as the year unfolds as our customers begin to play with this new unique molecules and the products we’re making from them.

Our next question comes from the line of Daniel Rizzo with Sidoti & Company.

Just a quick question. You indicated that some of your expenses were up just due to some of the initiatives you guys have going on. I’m talking about the marketing and administrative, is this run rate what’s probable going forward?

We would anticipate some of our growth expenses will actually increase slightly as the year unfolds as we fill open positions that we have identified. So, some of our operating expenses will go up slightly from where they’re at today.

[Operator Instructions] We do have another question. It comes from the line of Greg Halter with Great Lakes Review. Please go ahead.

Jim, couple of questions on the balance sheet, I wondered if you had available the accounts receivable and payable figures.

Absolutely. So as of 12/31, the receivables are $288 million, inventories are $135.8 million, and payables are $151.3 million.

And you said 12/31, you meant 3/31?

Yes. 3/31, I am sorry.

Okay. And the receivable was $288 million, correct?

Yes.

And again you’ve touched on this briefly already, but marketing expense, I think, was up about 27% year-over-year and as Quinn, you just mentioned, you see some increase there, at least through the 3 categories, does that include marketing expense and do you see them up at this type of percentage on a year-over-year basis going forward?

Yes. We will see it up at that level. Keep in mind that the good chunk of this is the Lipid Nutrition product line acquisition. So we’ve got all of those new employees weren’t in the first quarter of last year. And then we did step up for some of these global growth initiatives. So we’ve added people that are also contributing to the higher level of operating expenses.

I think, we’ve added -- significant amount of people in Poland, Brazil and in Singapore consistent with the areas that we targeted for growth.

Okay. And Lipid though that anniversary’s in June, so you get some year-over-year?

That’s correct.

Yes. The year-over-year comparison will come down, but the absolute run rate that you are seeing now isn’t going to, as Quinn said, it’s more likely to creep a little bit higher as we fill additional positions we’re trying to fill.

Okay. And on the enhanced oil recovery now that Nalco has been absorbed by Ecolab, is there any change in the joint venture structure format or what have you?

To date we have seen no change in the -- from Nalco’s interest in the joint venture. In fact they are still very enthusiastic about the joint venture and we’ve seen no structural difference as a result of Ecolab’s ownership of Nalco.

And are you still working on the commercial test floods and any results you can share there?

We are still working on some commercial floods and what I would say today is that some of our customers are very pleased with the results that they have. Other customers did not get the full oil, the full oil that they were projecting out of the flood and we are working with them to understand why the test was not completely successful. So it’s still a developmental market. We as [indiscernible] and our customers are still learning exactly how to implement pilots around the world.

Okay. And there is comment in the press release, in fact in the last paragraph, where the opportunity to build on is solid starting to deliver significant earnings growth in 2012, and then Quinn I thought in your prepared remarks you said significant surfactant growth and I just wonder, is that true for both or am I mishearing something?

Both, both.

Okay.

I think we are optimistic across all 3 of our businesses today.

And would you care to venture what significant means, is that 5%, 10% or 25%?

I do not care to venture.

And one last one for you, relative to raw materials and outlook for price increases just wondered where we stand as of, what is today, the 25th of April?

Yes. We have a number of our raw materials some of them are moving up, some of them are moving down. But for the balance of the year, we are projecting somewhat stability from a large picture perspective, stability of raw materials throughout the course of the year. So I don’t anticipate significant changes in our margins as the year goes forward. So at least as a result of raw material actions.

And we have no further questions at this time, I would like to turn it back over to management for closing remarks and comments.

Thank you very much. I would like to thank everyone for joining Jim and I on the call today. We look forward to reporting back to you on our second quarter 2012 results. Have a great day. Thank you very much.

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.