Q3 2019 Earnings Call
Greetings and welcome to the Stepan Company third quarter 2019 earnings conference call. During the presentation, all participants will be in listen only mode. Afterwards, we will conduct a question answer session at that time. If you have a question. Please press the one followed by before on your telephone.
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As a reminder, today's conference is being recorded Wednesday October 23, 2019 I.
I would now like to turn the conference over to believe <unk>, Vice President Finance and Chief Financial Officer. Please go ahead.
Good morning, Thank you for joining Stepan company third quarter 2019 financial review.
Before we begin please note that information in this conference call contains forward looking statement.
No historical facts, he says statements involve risks and uncertainties.
Cause actual results could differ materially.
Doing but not limited to prospects what I, we're putting operations.
Well I'm really not economic conditions factors.
What's acuity change comedy shown fighting.
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Now with that I would like to talk to the goal over to me stuff, we must have been junior <unk>, Chairman, President and Chief Executive Officer.
Thank you Louise good morning.
Thank you all for joining us today.
Despite the challenging current environment, the company's quarterly net income and adjusted net income exceeded prior year.
And through nine months adjusted net income is ahead of last year's record.
For the quarter surfactant earnings were down due to lower commodity volumes in North America, and the slow recovery of our business in Mexico.
The polymer business had a strong third quarter driven by global Richard Polyol volume growth.
Specialty product income was down due to customer order patterns, but we'll deliver significant profit growth for the year.
Third quarter, adjusted net income was $27.9 billion or $1.20 cents per diluted share.
Versus $26.4 billion or $1.13 cents per diluted share in the prior year.
First nine months adjusted net income was $93.7 million or $4.02 per diluted share versus $92.2 million or $3. A 95 cents per diluted share in 2018.
Surfactant operating income results for the first nine months have been negatively impacted by the kind of thing equipment failure.
Wet weather in the U.S. farm belt.
Weak demand in the global consumer product and market and foreign currency translation.
The polymer business improved significantly during the quarter.
And is up for the first nine months on the strength of volume growth and slight margin improvement.
North American and European rigid polyol volumes have grown 11% and 8% respectively. During the first nine months versus last year.
Specialty product operating income was down.
Slightly compared to prior year quarter, primarily due to unfavorable order timing.
Within our pharmaceutical business, largely offset by improved medium chain triglyceride product margins.
The company in Greece, just quarterly cash dividend the fourth quarter of 2019 by two and a half cents per share or 10%.
Marking the 52nd consecutive year at the company has increased as cash dividends to stockholders.
The quarterly cash dividend on Stepans common stock is now 27, and a half centsper share.
Well on December 13, 2019.
At this point I would like Luis to walk through a few more details about our third quarter results.
Thank you we my comments will generally follow the slide presentation, let's just started with us like for recap the quarter.
Adjusted net income for the third quarter 2019 was $27.9 million.
6% increase versus $26.4 million in the third quarter 2018.
It goes adjusted net income is a non-GAAP measure we put a like for reconciliations to the comparable GAAP measures.
These can be found in our family store representation on day, one tool that press release.
Specifically adjustment to report that net income for this quarter with me for deferred compensation expense restructuring expenses.
Adjusted net income for the quarter to exclude deferred compensation expense of $1.7 million.
Or seven cents per diluted share.
Compared to deferred compensation expense of $2.6 million or 11 cents per diluted share.
Maybe for compensation number should present, the net expense related to the company's deferred compensation plan.
As well.
Settle stock appreciation rights when I was named please.
Because these liabilities change within movement, we're stock price with glued these items from our operation discussion.
Adjusted net income for the quarter also exclude cedar point $3 million or two cents per diluted share after tax business restructuring charges.
Rate related to ongoing decommissioning costs related to the Canadian plant closure during 2017.
On the gentleman issued financial shutdown in 2018.
With banks on additional Cedar point $8 million of after tax decommissioning expenses in 2019.
Slide five shows a total company earnings proceeds for the third quarter compared to last years quarter.
Breaks down the increase in adjusted net income.
Because this is net income fee, but it's not an add on an after tax basis.
We'll call it is settling in more detail, but to summarize sort of fact on a specialty portals went down while 40 metal was up versus the prior year.
Favorable net interest expense was related to higher interest income in the us after the company cash repatriation in 2018.
The company's effective tax rate was 17.3% for the first nine months of 2019 versus 18.7% for the first nine month of 2018.
Got over year decrease was primarily due to higher us R&D tax credits.
So the offset by onetime favorable tax project.
As in 18.
We expect the full year 2019 effective tax rate to be in the range of 18% to 21%.
Slide six focus on so in fact on segment results for the quarter surfactant operating income in the quarter decreased $9.2 million versus prior year, primarily due to lower service volume higher inventory related costs associated with a company internal Asian use supply chain and LSC will impact.
Okay. We then say nordine caught up in Mexico.
So in fact on net sales were 300 million dollar for the quarter, 14% decrease versus the prior year.
Sales volume decreased 8%, mostly due to the company Xcedes comes from financial business in Germany in 2018, low, whereas before total demand due to the wet weather in the U.S farm belt and lower commodity demand in the us consumer product markets.
Selling prices were down 4%, primarily due to the fact that will lower raw material costs.
Nation impact of a stronger us dollar decrease net sales by 2%.
In the breach we show North American Asia in the same category because our surfactant business in Asia is relatively small most of US with fact on production in that region issues to support business in United States.
The North America decrease was primarily driven by lower commodity consumer product volumes soft quarter of demand due to the wet weather in the United States farm belt, and higher inventory costs related to internal Asian supply chain system.
Latin America is down due to a kind of big Mexicos within Asia, and women Faler Brasil effect on onetime benefits in the prior year.
The kind of bank facility is now fully operational and we ought to cut out already regaining the business.
Companies insurance provider has a knowledge. This incident, you said covenants keybanc.
European results increased despite FX headwinds on the exit of the low margin sulfonation be assessing gentleman that even by strong growth indefinitely quotes around market.
Now turning to polymers on slide seven.
Volume at operating income increased $4 million versus prior year, primarily due to higher sales volume on a more favorable product mix.
40, more net sales were 135 million dollar for the quarter down 5% versus the prior year.
Total sales volume increased 3%.
Lower reported overall growth of 6% was partially offset by lower BA and specialty polyol volumes.
Selling prices declined 6% on the translation impact for stronger us dollar negatively impacted net sales by 2%.
Global Polyol volumes increased 3% due to reduced volume growth of 6% driven by North America Asia.
The strong market demand ingredient polio was driven by increasing installation standards and growth in construction.
North America order, we sold increased due to strong volume growth on a slight margin improvement.
Beyond results in could easier to slight margin improvement.
China results improve on 54% volume growth.
When by increase the mining color storage insulation.
Finally.
We sold decreased due to lower volumes.
Specialty products operating income decreased zero point $4 million versus the prior year, primarily due to put it will order timing differences within our pharmaceutical business.
Partially offset by improved margins with our MCT product line.
Specialty products net sales were 17 million dollar for the quarter, 14% decrease versus prior year.
Sales volume decline, 2% for the quarter.
Turning to slide eight.
Our balance sheet remains as strong as we continue to have known net debt.
During the first nine month of 2019, the company paid $16.9 million of dividends on repurchased $13.2 million of company stock.
Beginning on slide nine.
We will not update you on our strategic priorities and plans to increase shareholder value.
Thank you Luis.
Looking forward, we believe our surfactant strategy will deliver value for our shareholders. Despite the current headwinds.
Our continued focus on end market diversification tier two and tier three customers as well as our cost out activities should improve future margins.
We remain optimistic the polymer business will deliver full year volume growth and incremental margin improvement versus 2018, given our strong rigid polyol growth in the first nine months.
We believe full year specialty product results will improve versus 2018 on the strength of its nine month earnings.
Overall, despite the current year challenges, we have an opportunity to deliver another year of adjusted net income growth.
Turning to slide 10.
We've made good progress on our market diversification efforts, which continues to be a key component of our strategy.
Although volume to the functional end markets decrease during the quarter on lower demand for agricultural products in North America due to the wet weather our agricultural volume in Latin America increase 35%.
During the first nine months, our global agricultural volume is up versus last year.
We are expanding our presence in specialty consulates with new dedicated technical resources and have introduced 13, new products over the past 18 months.
Next our focus on customer intimacy continues to be a priority in order to deliver growth within our tier two tier three.
Surfaxin customer base and to maintain our leadership position in several of our key businesses.
However, tier two and tier three surfactant customer volumes decreased 7% during the quarter.
Primarily due to competitive pressure in North America.
Our exit from the sulfonation business in Germany.
Global rigid polyol volumes increased 6% during the quarter.
Due to strong market demand driven by increased installation standards and growth in construction.
We remain optimistic about continued growth of the rigid polyol market due to global energy conservation efforts.
Innovation is a key part of our strategy as a leader in the rigid polyester polyol market. We continue to work on developing the next generation of value added technologies for our customer base.
The launch of Stepan Quad Helios is well underway North American personal care customers are responding positively to this new hair care conditioner ingredient that as miles and safer for the environment.
During the quarter, we continue to sell Stepan caught helio in North America.
We now.
Also have introduced the product in Latin America, Brazil, and India.
Next.
Operational excellence is an integral part of our strategy. We believe that the application of Sulfonation best practices network synergies and drive cost saving opportunities will create long term value from our economy back acquisition.
We're also delivering savings on the shutdown of our surfactant operations at divesting, Germany plant.
We will continue to examine our asset base for opportunities to further optimize and improved capacity utilization and two more efficiently serve our customers around the world.
Operational excellence excellence can be delivered from all groups within our company.
During this calendar year, we have significantly improve the contributions from our finance team.
We have reduced interest net expenses delivered an efficient effective tax rate and reduce past due receivables all of which have improved our bottom line in cash position.
Finally, M&A represents an extremely important tool as a means to deliver meaningful EPS and EBITDA growth.
Over the next few years, given the strength of our balance sheet, we will continue to pursue M&A opportunities to fill gaps in our product portfolio and add new platform Chemistries.
Our core values customer focus people for continuous improvement integrity growth and innovation and sustainability described how we will accomplish our plan.
The market provides opportunities and challenges we feel we are well positioned to capture opportunities for you our shareholders.
This concludes our prepared remarks at this time, we would like to turn the call over for questions Jennifer.
Please review the instructions for the question portion of today's call.
Thank you.
I'd like to register your question. Please press the one followed by the four on your telephone you will hear three tone from to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press. The one followed by this story.
And ladies and gentlemen, if you'd like to register question Press one for on your telephone keypad.
And our first question comes from the line of Jason Rodgers with Great Lakes Review. Please proceed with your question.
Yes, good morning.
Good morning, Jason Good morning.
We want to quantify the sorry would you be able to quantify the onetime inventory costs related to the Asian use supply chain.
Yes, it's roughly around $2 million when you when you include everything.
All right and then in regards to the comments around the smaller customers in North America that you're targeting.
For surfactants, you mentioned some competitive pressure.
Is that was that a new phenomenon as that getting worse as far as the competitive environment was that why that was called out.
I think we're seeing.
A slight increases.
Increased.
Material being shipped in from offshore into the United States and it's.
Having a.
Impact on some of the commodity margins in that space.
All right.
And then any rebound in the agricultural business in North America, So far in the current quarter after the wet weather.
We are anticipating the fourth quarter to be up sequentially from kind of the third quarter, but generally there is seasonality associated with the business and we typically expect to higher performance in the fourth quarter anyway, but we are seeing.
Yes.
Global basis, we are anticipating the AG business to be up in the fourth quarter.
Okay. Thank you.
Thank you Jason.
Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi, good morning.
Good morning, Mike Good morning, Mike.
The surfactant performance I think particularly in North America, and Latin America seems like its depressed.
Just if we look at the volume trends as well as some of the unusual costs that you've mentioned, both the inventory cost or supply chain cost as well as well as the caught APAC outage.
Can you talk a little bit about what's the timeline for volume and operating income recovery could look like is that something thats going to remain depressed.
In the Q4 in Q1 or is it something that could come back.
Sooner than that.
As we look at our business today I would tell you that we anticipate that the volumes will be up in Q4 versus Q3.
We've had some customer implementations of.
New skews that were delayed into the quarter.
But but I don't see significant growth.
In the commodity space.
2000 into.
Q4, 2019 or into 2020 at this point in time.
Maybe a question on the commodity side of the surfactants business.
To some extent as this part of your diversification strategy. This idea that maybe we try to work down our reliance on commodity volumes and increase the specialty side of the business and maybe tied into that can you comment on where.
Capacity utilization utilization sits today.
Within your surfactants or your sulfonation.
Yes.
Yes, it's certainly a key part of our strategy going forward to continue to grow in the more functional markets of surfactants and we have a significant part of our R&D and marketing efforts skew toward growth in the functional markets.
So that is a priority for our company.
It's also a priority to continue to grow in the smaller regional accounts the tier two tier three customers and we have increased resources.
On a regional basis dedicated to.
Those smaller customers that we can leverage.
Our 90, almost 90 year history.
In that space and help them grow in their local markets. So that is a fundamental part of our strategy.
With regard to cut.
D. and deemphasizing.
Commodity business, we continue to work with larger customers to sell those products and.
We'll do so when it's economically attractive to us, but there are some global pressures in that segment.
From a capacity utilization on a north American basis, we still have some excess capacity within our network, we're probably operating AD.
75% to 80% of capacity utilization today I would say.
Alright, and then.
Question on the polymers business.
You mentioned better mix as something that was helping your polymers margin.
But it sounds like in terms of volumes Richard Polyols wear off while specialty Polyols were down MPV was down. So can you just help us understand maybe some of the margin differences between some of these product lines or maybe there are regional differences and maybe.
Provide some additional detail on what was stronger or weaker to generate that mix improvement that you saw in Q3.
Generally when we talk about an improved mix in polymers, we're talking about less pelican hydride and more rigid polyol.
Not at either Mike.
Alright, and then last question for me is just on the tax rate looks like Q3 tax rate was was very low I know you mentioned.
The R&D credits that came in.
But in terms of that Q4 number.
18% to 21% full year guidance kind of gives us a really wide range for Q4 tax rate.
So just wondering if you can help us understand the puts and takes around.
What might get you to the higher or lower end of that range.
Yes, as you know we always provide.
Wide range from the tax rate given the daily deals falls potential new projects or mix within the companies. For example, if we get if we any any type of insurance in Mexico up 30% tax rate of course can change the mix significantly Sol saw I will say.
If you look at that range.
It means falling needs.
What we're forecasting right now and.
And that will give you a rate for Q4 that ease that is consistent with what we have talked before and I won't be our ongoing.
Tax rating in the 20, 324% range.
Alright sounds good thank you very much.
Thanks, Mike Thanks.
As a reminder, if you wish to ask a question. Please press the one followed by the four on your telephone keypad.
Our next question comes from the line of Hinson Anderson with Stifel. Please proceed with your question.
Yes, good morning, and nice job and Polyols this quarter.
Thanks.
Yes.
I was hoping we could dig a little bit more into the surfactants margins.
If you're able and willing how much of that was due to sort of the direct or indirect expenses related to the plant closure in Germany.
How much of it was lower functional product mix and yes, all leading up so when we can expect those margins to normalize.
Based on what I will say that.
If you look at the margins on a year today basis.
Certain factors.
Thank you exclude delightful life for change on debate.
We are adding to ballpark similar to last year on vein you need to take into account that we have seen anything kind of losses year to date in the first three quarters.
Mexico saw Steve if you will be bears that out our margins are our own.
Autonavi healthy position when you look at the lower surfactant business last year, we closed a 9.9.
But if you exclude the nyphil.
More like 9.6.
Soul.
So again.
Yes, good that Mexico fees.
We are we audience.
Where margins are healthy on stable sequentially sole again, Q3 was particularly impacted by fuel cost items.
Yes, well ask with sales that all being 14% in surfactants of course, you have only been fix cost of equity on a hands on overhead impacting your margins on Thats why I mean, just sold a 6.6 in Q3.
I would I would encourage you to cut the that numbers more on long term basis and.
On on we are.
Simple season, so factor, we are growing and growing.
Yeah, we're malignancies polymers.
Polymers, what I would say solar so China.
Nice nailed down almost <unk> point.
Margins sole lighting margin improvements in North America, Europe , but vein of big John because of China. So the overall polymers.
I would use up 14% instead of 12 last year on specialty products is also growing significantly from the 15% last year to 20%. This year. So we feel good about about where margin situation.
Okay. Thank you and just to be clear so it's not as if there were.
Significant one time or short term expense related to the sulfonation plant closure that would roll off through either next quarter into 2020.
No.
Okay.
Thanks, and then so if I look at the agricultural demand obviously, the US was tough where you pose some some nice growth outside the US are you able to quantify roughly how much of that growth came from your recently introduced products.
Hi, I don't have the number here with me.
Yes, I don't have any here, we can we go on what about offline.
Okay.
And then just a bit more broadly on the strategy I was curious about your current ability to service private label personal care producers as well.
Whether that's a customer that you feel as maybe underrepresented in your current portfolio and what your strategy as for servicing the private label market going forward.
Stephanie.
Has.
Historically has had a fairly large presence in the personal or the private labels segment.
With key core relationships.
Primarily in North America, I would say that today, we are underrepresented in that marketplace in Europe today, particularly with the closure of our our German asset, but we have a presence with.
Many of the leading players in North America, we don't have a presence with all of them.
Recently was a share shift.
Within that segment in one of our key core customers lost some share to someone that we are not supply.
Okay, great. Thanks of it in a personal care space right right.
And actually if I can sneak one more and I would just be interested to know.
With regards to the competitive imports under more commoditized products.
Just generally where those are coming from and which products specifically are seeing the largest impact.
Yes, it would say that commodity, adding onyx either salt basins. So fond of gases typically coming in from.
China Korea.
Some of those are coming in from Israel.
And I would say, they're relatively limited presence in the smaller customers.
In particularly in the east and West Coast, the United States.
That's very helpful. Thank you.
As a reminder, she'd like to which to your question. Please press one for on your telephone keypad.
And we are showing I apologize we give a question for question is a follow up questions from the line, Mike Harrison with Seaport Global Securities. Please go ahead.
Hi, just a couple more on polymers first of all I heard you referenced Louise the that you're heading toward a 14%.
Operating margin number for polymers I think on the last call you kind of reference more of a 13 the 13.5%.
Is it fair to say that your your margin is tracking a little bit better.
Than what you had anticipated three months ago in polymers.
I would say these is better mainly because of the China situation.
Got it okay. So so with regard to that China's situation in this this cold storage opportunity, we've talked about that a little bit in the past, but I'm. Just wondering if you can help frame up the 54% volume growth number.
How how big is the cold storage market and kind of where do you guys sit within that market right now.
Just wondering how we should think about 50 plus percent volume growth in the context of that longer term opportunity for in cold storage and installation.
So so Mike Thats a good question, it's a question I've.
And pushing back on our China team try to understand if that growth is sustainable and though.
Well, we should anticipate and what I haven't told and what we believe is that the penetration of.
Cold storage or the presence of cold storage is still in its infancy in China and if we compare it to the U.S., we would take a look at China, maybe at a 20%.
Adoption rate.
And.
In China, and the United States is kind of 90, 95%. So should we do believe there is significant opportunities to grow and cold storage and it is sustainable over a period of time now we've been growing from a relatively small base. So that 54% is meaningful and we're swing.
Again that operation from a loss to a.
Small.
Yes, decent sized gain kind of a $4 million swing year over year in terms of operating income.
So so nice growth in that space and we believe is sustainable into 2020 and 21 certainly.
Okay, and then within polymers, you mentioned that fell again hydride volumes were lower can you comment on what you're seeing in PPA pricing.
Yes.
Pricing has been somewhat stable I would say.
But what we are seeing and I do think PAA is kind of.
Forward indicator of where the economy could go.
That in our tier two tier three customer base and so we do see some slowdown in those two market segments from a overall demand perspective, and that that has us a little bit concern for growth in those two areas in 2020.
Interesting okay.
And then last question is just around corporate expense that that was on an adjusted basis that was lower year on year I know that that span focus at some of your efforts, but can you maybe provide some guidance for Q4 corporate expense.
And any thoughts I know, it's a little bit early but any thoughts on what the 2020 corporate expense number could look like thank you.
Look we expect that Q4.
To be CV latitude to that drain that you have seen in the first three quarters.
On on Us we.
Adding to meet all of our budgeting process right now for 420, 21, I would say that we will continue balancing.
That hitting the bottom line ways the investments that we need to make into business to continue growing onto continue creating the couple of entities that we need Kevin on areas for our future growth.
Our future platform.
So we are always confident contemplating a portfolio of investments.
Opportunities be it said that us so we will would make sure that we have found rebels planning to any Boeing yet.
Yes.
Alright, thanks very much.
Thanks, Mike Thanks.
We have no further questions on the audio lines at this time.
Good.
Thank you very much for joining us on todays call. We appreciate your interest in ownership in Stepan Company. We look forward to reporting to you on our fourth quarter 2019 call. Thank you very much.
Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation in that that you kind of disconnect your line.
Yes.
Okay.
Thanks.
Yes.
All right.
Oh.
Or.