Q1 2020 Earnings Call
We will conduct a question answer session at that time. If you have a question. Please press star followed by the number one a your telephone if at any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded Tuesday April 21st 2020, you're speaking.
For today, our Luis run, though I would I like to turn the conference over to Mr. Luis Route. Please go ahead.
Good morning, and thank you for joining Stepan company's first quarter 2020 financial review.
Before we begin at least not that information. This confidence gold contains forward looking statements, we try not to historical facts.
These statements involve risks and uncertainties that could cause actual results to differ materially, including but not limited to prospects what our funding operational we'd all agree you're not economic conditions and factors the daily not where security and exchange Commission filing.
Well, there Johnny <unk> online or over the phone we encourage you to Rev. Yielding bastardi snipers invasion, which we have made available at www dot.
Belt Gall on the Investor Relations section of our website.
We make decent slides available on approximately the same time I wouldn't <unk> earnings release issue.
We hope that you find information on perspective health.
Now we thought I would like to talk to the goal over to me. So we know step on our chairman President and Chief Executive Officer.
Thank you Louise good morning, and thank you all for joining us.
Today, we are living in a difficult in uncertain world.
We are all concerned about our health and the health of those we love.
Many people have lost their jobs and are fearful as to how they will support themselves.
At step and we're very fortunate that many of the products, we sell contribute to the fight against the Corona virus.
Our plants are running and most importantly, we have been able to keep our people employed and healthy.
We have supported local first responders, including Chicago police and fire stations with free hand, sanitizer and disinfecting products.
We are grateful to all of our employees for their commitment to make our world healthier.
Now, let me provide an overview of our first quarter performance.
Given the global pandemic and the impact of the power outage at our Millsdale facility, we actually had a pretty good quarter.
First quarter adjusted net income was $24.2 million or one dollar and four cents per diluted share versus $30.6 million or $1.31 cents per diluted share in the prior year.
Excluding the estimated impact of the Millsdale power outage for which we have insurance adjusted net income would have been up versus the prior year.
In fact in operating income benefited from strong volumes in the global consumer product end markets driven by higher demand for cleaning and disinfecting products as a result of cobot 19.
Functional product volumes were down.
Mexican operations delivered strong year over year earnings growth.
Polymer operating income was down due to the power outage at build scale and significantly lower its Alan can hydride volumes global rigid polyol volumes were flat as growth in North America, and China was offset by lower demand in Europe due to cobot 19.
Our specialty product business results were higher due to improved volume and margins within our medium chain triglyceride product line.
Driven by strong demand and pantry loading in the infant nutrition market as a result of the covert 19 outbreak.
Our board of directors declared a quarterly cash dividend on Stepans common stock of 27, and a half centsper share payable on June 15th 2020.
At this point I'd like Luis to walk through a few more details about our first quarter results.
Thank you Queen My comments will generally follow this liveperson.
Yes, this time with us like for totally got water.
Just a net income for the first quarter 2020.
$24.2 million.
Were one dollar unfortunately, but these are the share.
When you want to be Buzztime decrease versus $80.6 million.
Or $1.31 cents per diluted share.
In the first quarter of 2019.
Well the stealing that but also so that's our mining all the associated with their meals the incident.
At this time, we believe they impact you saw at least $10 million went up but that spaces.
Because adjusted net income is another got make sure you put a like for reconciliations to comparable GAAP measures.
On these can be found yeah. Thanks to the presentation on table two of the press release.
Specifically adjusted to reported net income this quarter can see stuff I guess my thought to be fair compensation and cash settled sized incl I'm Saul minority stuff going on expenses.
Adjusted net income for the quarter exclusive for compensation income of $3.7 million or 15 cents per diluted share compared to deferred compensation expense of $5.1 million.22 per diluted share in the same feed your last year.
Deferred compensation numbers represent a net expense related to the company's deferred compensation plan as well as gosh shuttle stock appreciation rights, what I was named please.
Because these liabilities change without moving into stock price. We exclude these I can put out what Brad Chanel discussions.
Slide five shows a thought that company earnings, but each for the first quarter compared to last year's first quarter I'm breaks down that he could eat in adjusted net income.
Because thesis netting call they feel that's not a here I don't an after tax basis.
We will call that each segment in more detail, but to summarize surfactants and polymers went down why the specialty but all the was offset by your year.
Corporate expenses on older higher during the quarter due to higher acquisition related expenses, probably not so in fact since acquisition higher effective tax rate on foreign exchange losses.
Favorable Nadeem, Texas balance was related to higher interest income.
Companies effective tax rate was 22.5% into first quarter of 2020.
It was 19.5% into first quarter of 2019.
The increase was primarily attributable to lower tax benefits derived from the stock based compensation awards.
We expect a full year 2000 on Duena <unk> tax rate to be in the range of 20% to 25%.
It's like seeks focus on his would fact on segment, we sold for the quarter sort of fact on net sales were 300 on $27 million for the quarter, a 6% decrease versus the prior year.
Selling prices went down 3% by my leave you with the bathroom or lower raw material costs.
Sales volume was down 1% versus about your year.
Hi of the mine for products sold into our consumer Protos end markets that even buying could easily mindful cleaning and disinfecting, but all I thought we sold Gobinot Deane.
Was offset by lower sales volume felt were fortunate for auto and markets, primarily as a record for field.
So the fact that operating income decreased 1 million dollar versus the prior year or might lead you to higher costs are lost sales associated with our meals dealt plan I went outage on the negative impact of foreign currency translation.
These items were partially offset by a $4.2 million obeyed meaningful improvement in Mexico.
North America, we sold decreased primarily driven by higher supply chain expensive I lost sales associated with a pilot outage in Sudan I've been meals L. plant.
So what are the mine indefinitely quota flow feel and markets.
This was partially offset by you put on volumes consumer products did even higher the mining cleaning and disinfecting products due to Colby 19.
Nothing Amedica results were up you dropped 4.2 million <unk> operating income improvement in Mexico, but even by 17% volume growth and margin expansion.
Europe results were basically flat as higher consumer product. The mine I felt we sold the Gabi 19 was offset by volume reductions by wanting for phone calls.
Now turning to polymers on slide seven.
Net sales, what 100 down $6.5 million into quarter, and 11% decrease versus prior year.
Sales volume decreased 9% in the quarter from I leave yield for significant reduction in da volume you to their meals they'll power outage.
Global reviewed all use walliams what flat.
Having prices declined 1%.
Oh, the metal, but any income decreased $4.6 million, primarily due to higher calls on volume loss associated with the Muse outline what outage.
North America Polymet, we sold decreased due to higher cost on volume shortfalls associated with Immucell incident.
You polyol volumes increased by low single digits.
Europe results were basically flat, we know where renewed demand at the annual peak quarter, you'll do Colby 19.
D.A. resolves the could easier to the Millsdale incident.
Finally, China results improve on volume growth of 16%, but even biased but on the mining the between call it starts market.
Our specialty polyol Bces was up we've all regions growing operating income year on year.
Specialty products net sales were 16.4 million dollar for the quarter, a 15% decrease versus the prior year sales volume declined 8% for the quarter.
Operating income increased zero point $9 million versus the prior year, primarily due to improved volume and margins within our NCT profitably, but even biased but on demand pantry loading in the infant nutrition market I thought we sold a big coffee 19 outbreak.
Turning to slide eight I would've balance sheet remains strong we had negative net that what oh gosh balances of $254 million exceeded total debt of $222 million.
Capital spending was $33.2 million versus $25.7 million into prior year quarter.
For the full year capital expenditures are expected to be on very low side of the range of 100 $220 million.
Moving to slide nine.
We believe we have sufficient liquidity levels to operate in these challenging near term environment.
We have 200 on $54 million cash on hand, and we have access but for me to $350 million revolving credit agreement.
Our debt maturity schedule in 22, any is only $23 million.
Beginning on slide 10, we will now update you on our 2020 algae [noise].
Thank you Louise.
Looking forward, we believe 2020 is gonna be a difficult year for our world our country, our industry and Stepan company.
However, we believe in the current environment, our business is positioned better than most.
With empty store shelves around the world due to high demand for disinfection and cleaning products are surfactant volume in the consumer products market should remain relatively strong short term.
Falling raw material prices may provide an opportunity for margin improvement.
With dramatically lower oil prices demand for surfactants within the oilfield market will be down.
We anticipate our agricultural business should approximate last year's results.
Overall, we believe our surfactant business should remain relatively recession resistant.
Our polymer business, most likely will face a reduction in demand as people defer or cancel reroofing and new construction projects.
We believe in the long term prospects of this business remains attractive and energy conservation efforts and more stringent building codes should increase demand.
Our specialty products business should continue to benefit from medium chain triglyceride demand in the infant nutrition market.
Our favorite flavor and pharmaceutical product sales should be stable for the year.
After a good start to the year, we're positioned to continue to deliver critical products to our customer base.
However, our business is not without risk the continued health of individuals throughout the supply chain.
Our material suppliers logistics providers customers as well or as well as our own employees is critical for sustained performance.
We believe M&A represents an 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 look to identify and pursue acquisition opportunities to fill gaps in our product portfolio and to add new platform Chemistries. During the first quarter of 2020, Stepan acquired the nets or fat business, a ram no lifted based lineup bio.
Surfactants from logos technologies bio surfactants produce via fermentation from renewable resources offer opportunities in several strategic end use markets, including agricultural personal care and household cleaning.
With our strong balance sheet and available liquidity. We believe we are well positioned to operate in the challenging near term environment.
I want to close by thanking all step in employees for their effort and hard work to help us fight this pandemic.
Additionally, we want to thank our customers, our suppliers government agencies and and the local communities from which we operate for all their support during this unprecedented time.
We continue to be optimistic about our collective future and remain confident in the resiliency of people and the strength of the human spirit.
We will get through this together.
This concludes our prepared remarks at this time, we would like to turn the call over for questions Pasha. Please review the instructions for the question portion of today's call.
As a reminder to register afraid question Star followed by the number one.
Again, that's timeline.
Your first question, it's been a line of Vincent Anderson.
Thanks, Good morning, everyone.
Good morning.
Good morning.
So just briefly on agriculture I was curious how much of the weakness in the quarter could you attribute to some delays in spring planting that we've seen started to be here more rigs.
Yes, following on that has the business improved more recently.
What I would say is that there was a high level of inventory coming into within the agricultural sector of our business coming into this season.
So I don't know that we've seen significant delays and planting necessarily as we've seen a draw down of existing inventories. We do anticipate the balance of this year in North America that we would kind of be on plan or equal to budget.
We're going to offset the decrease in the first quarter in North America with Gloat global growth.
That's helpful. Thank you and then just quickly on the numbers in Mexico, how much of the improvement would you attribute to normalizing your operating conditions, there versus an uptick and maybe coal good related demand and that that current run rate of improvement what would that 4.2.
$2 million that you highlighted one Q look like in this quarter.
That being said this is raised a I will say half on half fees is viewed remember that last year. We had the we had the incident in a kind of paxil worse.
The 17% volume growth, you sort of slow but even.
Our driven by by belts that low base, but but I would say half on half piece is is this bleed.
And I guess I would further add that see the most of the improvement that we've seen is not cove involving related.
We are on plan with the volume that we put in our budget for the year.
So we feel good about that we did use that site to supply small amounts back to the United States.
During our Millsdale outage.
But so but our Mexican volume is on plan.
And we do anticipate and we are adding additional biased side capabilities in Mexico. So we do see that is being an opportunity for the second half of the year.
Primarily support in the U.S., but those right. We also have new registrations that'll allow us to sell that product line in Mexico.
Great. Thanks, if I could just ask one more quick one on non maps are fact.
Is that a commercial scale already and then I'll talk about it's not okay.
No.
Yeah, we bought a primarily what we bought as process technology and patented.
Process, specifically patented process technology, so that will accelerate our.
R&D program in that space.
Okay, and just out of curiosity.
What what specifically about this portfolio interest. So do you just kind of given historically fermentation based chemistries I'm kind of struggled to maintain profitability.
Yeah, there's a significant pull that's beginning in the market for bio based naturals surfactant. So.
This is we have a number of products historically in our line that our derivatives from coconut oil or palm oil, but we see this is kind of a new the new frontier for surfactants generally speaking they tend to cost a little bit more than petroleum based surfactants, particularly with oil today at minus $37.
As a barrel, but we do think it's a long term play and our customers, particularly the large consumer product companies are looking for.
Bio based products to formulate with.
That's great. Thank you.
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Your next question is spent a lot of Mike Harrison.
Hi, good morning.
Good morning, Mike.
I was wondering if you could help us understand the a the mill Theyll outage, what's the what the impact was from an operating income perspective in both the surfactants business and the polymers business if you could.
I you know what I would say is so we believe the cost in the first quarter, where at least $10 million that cost to date, it would be equally split more or less between the surfactants in the polymer business. We may have some additional expenses in Q2 and those would be more drew.
Exactly applicable to the polymer business, we have been shipping some material from Europe back to the United States and some of those some of that volume is still in transit.
Alright. Thank you and then what's also just wondering in terms of that outage.
And the surfactants business were you able to meet a this increasing demand that's been associated with total bid and with the increase in demand for consumer cleaning and disinfecting applications are are you kind of for you.
100% able to deliver on surfactant demand and are you fully back to being able to to be 100 person.
Fulfilling those orders now.
Yeah, and I would first say that ER our team at the Millsdale plan did a fabulous job restoring production at the site.
And the in addition to that we had a lot of support from the the other plants in our network in North America. So we actually lost.
Small amount of business in our surfactant.
In our surfactant line during this period.
So our inventories are generally low.
As we were coming out of that period, so we weren't able to ship.
Everything that the customers ordered but pretty close pretty close and.
Yeah in our surfactant line not true for.
Falcon hydride certainly and we did it did have some back orders in the polyol marketplace that we're shipping in April March and April so, but I would say weve for the most part we've been able to.
Ship all of the covert 19 related demand and maybe if I could just expand on that a little bit.
As you see some of the large consumer product companies and when they start and have started making their earnings announcements are talking about potentially an increase in demand.
For cleaning products on a sustained basis, we have sufficient antibiotic capacity. So it was our sulfonation product line in North America to support that.
In our Amphenol tariff product line, which is our batch reactors.
They tend to be used a little bit more in hand washing. We're we're snog I would say in that area, but have some incremental capacity that that we could bring to the market to bear and from a bias idle Quaternary perspective, we have sufficient capacity to support growth.
Both in the market or significant more growth in the market, but in that case raw materials are a significant concern.
And so raw materials.
Our limiting our ability to capture some increased demand in that space today, and we're trying to work with our suppliers across three or four different key product lines in that space to bring additional.
Volume to the marketplace.
[noise] Oh I bet that actually is kind of a question that I wanted to get to win is maybe understanding.
In terms of some of these applications that you're serving can you walk through areas, where you're seeing demand.
Well ahead of normal I assume things like hand soap or other handwashing types of products disinfecting wipes that's off the charts right now.
Can you just maybe help us understand where we are relatively normal and also maybe talk a little bit about the margin profile on some of those products compared to detergents, which I think of is being lower margin and maybe some of the functional surfactants, which I think I'll just be some of your highest margin products.
[laughter].
Yeah. So so.
And they started to break it down a little bit.
So let's start with a bias cytof lotteries first so again I mentioned those are for example are used in clorox wipes are used in lysol and other hard surface cleaning products.
In the marketplace today those products tend to be.
More profitable than some of the other materials on our range.
There are three companies in the United States that have.
Those products registered with the the U.S. EPA.
And again, so I would say when we sell additional volume and it tends to be accretive to our business sales a in the first quarter for those products were up.
19, Yeah, the 18 18, 19% for the first quarter.
With most of that increased demand occurring in the month to March.
Okay and then so so that that's one example.
And then we've talked about and for Terex, generally mean oxides and butane specifically those tend to be more commodity.
Products.
And those that volume globally was up a little bit, but it's still.
Low single digits.
And then alcohol Sulfates, which are kinda companion products used in many of the hand, so that was up order magnitude about 10%.
Yeah. So.
I would say.
Our ability to respond to the mean oxides and the butane product lines again, Thats, where I said, we had were tight but we have opportunities to get squeezed a little bit more.
Capacity or throughput from our assets [noise].
[noise], Alright, and then or maybe a last question on the polymers business just in terms of construction activity you mentioned the slowing that you saw during Q1 in Europe.
Yeah. It seems like Europe is kind of two weeks ahead of where North America is so I'm just maybe comment on how you saw a construction activity [noise] trending in Europe.
And maybe what you're seeing in North America, Oh, I guess in March and thus far in April.
Yeah and saw a significant decrease in activity in Q1, particularly it got to March.
In Europe.
And.
Uh huh.
Yes.
I'm seeing significant decrease and we we see that as a possibility coming in in.
In the U.S.
Potentially in kind of made June type timeframe.
Probably June what we are also seeing in that space. Some of the schools are pulling forward some of their reroofing projects.
That had been previously approved and why the kids are not in this in the classrooms are looking forward to pulling some of projects forward. So so we think probably late may or June June we may see a decrease in activity in that space in North America.
All right thanks very much.
Thank you Mike.
As a reminder to answer your first question Press Star followed by the number what are your telephone again thats timeline.
Your next question, it's been a line of David Silver.
Yeah, Good morning, David.
Yes can you hear me here.
Yes, we can.
Okay sorry.
So I'm going to apologize in advance I had to join the call a little bit late so.
Maybe asking you to repeat yourself.
The first question I just wanted to review the.
Cash flow.
In the first quarters so.
I'm not so much year over year, but sequentially.
And I just wanted to clarify that but.
By my calculation the net use of cash in the first quarter was $90 million I know.
And I was just wondering if you could break that down how much is kind of normal working capital build up let's say.
Versus some incremental expenses or or other items, you know that that are not purely working capital related and you know just in general maybe compared to the last couple of first quarters, how does the.
Draw.
This year for working capital and other uses compare.
Thank you yeah, maybe the interest rates, what I would say that consumption gas consumption in Q1.
Steve vehicle for four foot all right I mean, we half a lot of working capital usage in Q1.
Bonus payments in Q1, it said that up so.
At the end what we saw in Q1 was very similar to the to the to the older years, but I probably a couple of factors that will lead to be higher Capex was higher as we mentioned $33 million versus last year 25.
We need a share buybacks for $7 million into quarter. So those out of the two parts equal our numbers that I lead to be different versus versus all that Q ones budding Janet al we always have a cash consumption owning or.
Cash consumption in Q1 in sure.
Okay great.
Second question would be about your Mexican facility.
And.
You know my sense is that the improvement in financial results. This quarter was a little bit little bit greater than maybe I anticipated or.
That was.
Indicated.
Our expected from year end I was wondering you mentioned the 17% volume increase on a scale of zero to 100% where do you think.
Pickup that pick a facility was operating during the quarter and when do you think it would be back to 100%.
Well in other words incremental improvement above what we saw in me a second quarter, yes. The let me answer that question a couple of different ways.
One you I I would I would say in terms of existing capacity, we're probably in the 80% range.
We do have a project to de bottleneck that site.
We are working on and we'll have additional capacity available.
Probably towards the end of this year the Q1 of next year.
So so we Oh, we have an expansion project gone, but the other thing there is a short term issue right now in terms of covert 19.
The Mexican government as.
Limited the.
And is restricting.
People over 60 years old two there.
Through their quarters.
If you will there sheltering in place. So so we are short some employees in our current Mexican facilities, we are having management work with our union employees to run the units today and we're hiring some temporary employees on site.
But so there is a limit to how much we can.
Push those sites until the pandemic a it eases that we can return.
A significant amount of our workforce back back to the site.
Okay I had a couple of questions I guess.
About just the broader market so I.
I apologize this might be a little garbled, but first question would be related to offshore competition.
So in other words, I guess economic growth and demand for you know a lot of your product has.
Declined globally.
I Wonder if you know that translates into more opportunistic exporting out of Asia or whatever but I'm. Just wondering if you could comment on on that maybe you know the dollars a little stronger as well I mean, how do you view that potential threat you know too.
Either your demand or or the pricing through your major product.
And then I separately I was wondering if you could comment on your if you could follow up or add some color to your comments about potential raw material cost savings and the reason I mentioned that is.
I'm, certainly aware of where oil traded yesterday, but.
My impression is the U.S. petrochemical market is not so much tied to oil these days, but really to natural gas.
Okay, the ethylene and.
Excluding oxide ethylene glycol and things like that.
And I'm just wondering you know for your main facility that might be supplied out of the U.S. goal for wherever I mean, you can do you see a meaningful raw material cost benefit.
Or is the potential a little bit more I don't know incremental so the offshore competition and the potential for raw material cost savings you could add color. There I'd appreciate it. Thank you. Okay. So so from an offshore uppers.
Competitor perspective, let me first deal with our polymer business, because that's pretty straightforward we see limited.
Competition and.
In the polyol area.
Coming from overseas.
There is sufficient capacity in the United States today.
And so we don't see a lot of imports into the United States from metallic and hydride perspective molten ballack in hydride.
Issues by the majority of our customers molten Falcon hydride is not imported into the United States. There are some bags are super Sachs that come into the United States. So there is some offshore competition and talent can hydride.
From a surfactants perspective.
Jeff Surfactants generally have a fair amount of water associated with it and the commodity range of our products generally don't travel fairly well the profitability of them would be offset by the the incremental freight and so so generally is not a significant a lot.
Out of competition in the commodity surfactant line and when you get into the specialties lines various lines.
You can see import competition.
But.
In the Buyside area for example that we've talked about there are U.S. EPA registration said are required to sell the active ingredient and are required for people to have.
Registered formulations that actually use the products as well. So so there tends not to be a lot of important competitions in that space.
In terms of.
You're correct that the most of the U.S. chemical industry is based on natural gas versus oil, but the two do you know the to do meet move together.
A little bit.
And we do it's too early to tell whether the.
Whether there's going to be margin improvement, but the prices for our polymer raw materials decrease keep to raw materials decreased 50%. So so there will be.
There will be a impact on sales at a minimum as we go forward.
And I.
I think theres more opportunity within within our surfactants business for margin enhancement think theres a little bit of.
Vulnerability relative to our polymer business because we are planning for the Illinois River closure that we've talked about.
And so we had high inventories of high price raw materials. So we're working through those today, but.
But I think that short term, that's more of a vulnerability than an opportunity for us.
Okay.
Is that okay, if I add one more here whether it.
Sure.
Hi, Good question I apologize I'm going to ask you to put your product manager had on a little bit but you know in looking at a I was looking at on a couple of web government websites and in particular I was looking at lift and from the EPA, which includes more than 30 of your.
Products that are approved for use again.
Corona buyers.
Okay and I was just wondering as looking at the list.
More than 30 or your products are listed all of them or quasi quaternary compound.
At but also on the list there were some non Quaternary you know products Oh by the profile alcohol hydrogen peroxide, which I'm, assuming our lower price.
Alternatives.
So could you maybe discussed you know in this current environment, how you're you're quaternary.
Pete again.
The other approved products that are based on perhaps lower cost.
They anti viral disinfectants is there is there kind of away you know a way to think about that or is it or is it I don't know the all in the formulation that it's too hard to kind of separate and apart.
Yes, it's in the formulation, but it's also in the surfaces that you treat.
So so there.
Which is a very effective disinfectant, it's very effective against krona virus, probably more effective than.
Than by setup Quaternary.
From a technical perspective.
Depending on the surface that your cleaning that depending on the surface that you're trying to treat.
So our products are generally use the in hard surface cleaning.
You know that there will not be damaged by bleach. So so thats, where the strength of our product line Reston and again, we're in Clorox wipes. We're in we're in lysol, so products that tend to be little more gentle to services and can.
But generally when you're talking about finding a virus you want to use a range of active ingredients.
To fight them as well so.
Beyond that you're going to get in over my head show [laughter] over my head to but no I apologize I know there was a kind of detail on those lift that I kind of the skipped over but.
Okay. Thanks, very much I appreciate it.
Thank you.
As a reminder, if he would like to register for any question. Please press star followed by the number one on your telephone I can best timeline.
At this time, Sir there are no further questions.
Okay. Thank you all very much for joining us on today's call. We appreciate your interest in ownership and Stepan company. We look forward to reporting to you on our second quarter call be safe stay healthy.
Thank you very much.
Thank you, ladies and gentlemen, participating in today's conference call. We exit you know please disconnect your lines.
[noise].