SCL - Earnings call transcript Q3 2018

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Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Stepan Third Quarter 2018 Earnings Call. [Operator Instructions].

As a reminder, this conference is being recorded, Wednesday, October 24, 2018. I would now like to turn the conference over to Luis Rojo, Vice President of Finance and Chief Financial Officer. sir. ahead, go Please

Luis Rojo

thank review. joining and quarter Company's XXXX financial you morning, Stepan for third Good

Commission begin, Securities or note us historical and and as operations, you these we www.stepan.com cause not make of joining the forward-looking factors when involve hope made which phone, Before to limited please and section and regional review over actual is We time statements, and call this risks in find filings. of materially, you that at online the detailed which we slides economic contains and earnings release we results conference available to, to Whether conditions are the the under including, available that prospects you're we global not presentation, uncertainties Relations facts. Exchange information differ statements website. that encourage the These at our Investor investor could information issued, perspectives approximately but slide our in same foreign have helpful. our the

with to call Stepan to Quinn President turn our I like Chairman, Now over Jr., and the CEO. would that,

Quinn Stepan

to had thank good you, Stepan XXXX. of Good today. for third adjusted Company income reported record Thank joining first Luis. quarter, us all you X months and and morning, contributing net the the a for

lingering the driven was to million, over up quarter. were Up Surfactant versus versus Polymer was volumes and operating and results customer X% as rate. effects XX% were X% Third third as we quarter of well prior a prior lower sales shortage record and up Europe, million period. year XXXX the record quarter, the first communicated. MDI and margin due X which lower prior rigid have down manufacturing a These months year respectively. and the operating tax in $XX and costs. Global higher from adjusted net prior and Surfactant year income continued due previously income XX% polyol $XX.X to effective were mix year earnings XXXX challenges volume product income the the improved by

per business of quarter partial Products its consecutive cash results The XXXX quarter cash half order by catch XX%, its company our that dividend in first increased this few the Specialty $X.XXX about fourth Our details dividend the up results. to point, a At to shareholders. in or Luis for increased share timing like year. due marking XXst third differences up has the I'd quarterly of company the walk quarter year through more the were encountered of to the the

Luis Rojo

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

with Let's recap to the start quarter. Slide X

in adjusted net of stated, share for release. can share, Quinn of diluted measures, a GAAP measure, third diluted net and $XX provide II million that a presentation X million quarter or quarter is Appendix these the to we comparable and the found income in non-GAAP the Table be press full $X.XX -- of and the XXXX. $XX.X $X.XX As reconciliations third the income Because per or XX% has per versus was increase XXXX adjusted

of deferred compensation income expenses normal income. period last compensation compensation to exclude adjustments $X.X resulting million deferred per for net our Naturally, operating quarter or in are same to compensation Specifically, of Adjusted diluted income million year. $X.XX compared and quarter share expenses deferred share for reported the consist diluted $X.XX expenses. net the employee in of $X.X income reflected or this all adjustment per expenses

per share business of quarter $X.XX the change and The million $X.X operational as related spare the this only the value. expense incentive of our the or and also some quarter opportunity current defer year we related adjusted after-tax with to of we our operations after-tax million the to exclude the third liability income Because is the from German market parts this restructuring increases, stock plant stock item of future net decommissioning company's write-down, compensation Surfactant mark to at the charges. expense related However, on shutdown in date, their we assets stock generated employee employees payouts changes payment and When future future allow after-tax $X excluded our diluted prior of until based changes price. price, $XXX,XXX discussion. These closure. charges to consistently item plant to price Canadian

an after-tax total additional decommissioning XXXX. both an costs German restructuring of after-tax at $X to expenses in down the company additional decommissioning basis. third the charges of noted breaks is for at income. $XXX,XXX net third compared and are quarter net in our the X XXXX earnings year's million Fieldsboro Canadian We increase and plant expect on our plants related and Slide the income, quarter figures bridge after-tax this last shows adjusted here Because an in to

XXXX was was was summarize, first for lower Polymers U.S. separation will while rate prior XX% company's versus quarter the more first Surfactants The mainly tax Corporate the and of the due first XX.X% higher the XX.X% the X were Specialty months the rate first employee in to X months were in during of XXXX. months months in We versus disclosed of of tax up and and versus effective previously The each statutory year. salaries X to expense. X XXXX of for XX% Products to cover decrease compensation detail, higher a XXXX. down due expenses costs the but segment incentive-based

results up X% on X%, while Slide full sales tax effective Surfactant X expect a ago. year range were to increased from prices Volume the selling X%. $XXX segment We year the Surfactant to increased be the third rate million, net in quarter XXXX same quarter. average of for the focuses XX% XX%.

America, American higher despite increased to foreign $X.X Asia offset and bridge, Excluding versus to that growth relatively business volumes logistic In United region the North sales income volume operating business States. XX% The category QX in in or and by is due the prior is and of in our mainly the show America the this driven down, in in higher America North year, same Asia Higher foreign a most headwind. sales and million increased and to increased volume the demand were quarter used in exchange partners product North increase. production distribution contributed volume Surfactant the first higher net support small consumer our due while segment mainly exchange acquisition Mexico. volume X%. America strong and strong to sales Organic mix, agricultural also by America favorable related products translation oilfield Mexico, volumes. North results North because acquisition in cost in to the Latin Surfactant X%, was sales partially we to the

the that slightly European were be the up We acquisition should and results continue improved accretive due to primarily margin. volume year. commodity to for products higher believe consumer

the the on in The quarter million polyol down margin volumes dollar and lower a Rigid selling principally X. rigid was volume. polyol driven conservation insulation MDI shortage. X% by remains half prices as year lower for Europe. due growth Global declined strong will fourth impact higher the primarily its was translation result to recapture volumes scheduled global to operating sales rigid to European global increase in sales PA continued Operating increase A market. Lower within $XXX decreased income market volume Specialty the Now of was stronger quarter, of of quarter Slide year. mostly material volume for from volumes due turning Net total X% share X% versus decreased million prior the quarter of X% year We continued while the effect Global the million the Products our lingering which a PA same production for $X.X favorable to first in down the to favorable income North U.S. PA maintenance timing Polyol X%, X%. by income impacted America $XX.X due business, were strong reduced prior in results compensated quarter a yield. $XX.X volume. an by due believe global Polymer to sales million negatively of of increased sales shortfall. due increased the some energy was last efforts. Operating due XXXX. was differences The with turnaround quarter versus volume net quarter, X%. impact despite polyol to a flavor of and increase for for million, $X.X XXXX negatively period. Total volume

X%. shareholder increase which represents remains X, company you The the the of we'll flow free X, to at shareholders Turning returned quarter million flow on generated conversion net $X.X XX%. strong debt remains of value. on repurchase. via cash our million $XX.X free our Beginning as to update now Slide plans during during our quarter, dividends Slide to third and low cash balance share our We sheet

Quinn Stepan

we X internal the record Products, from Luis. After efficiencies continue into you, Thank months, Surfactant technologies, benefit year. broad our the remain first expanded net optimistic improved globally. and customer through achieving new into sales about will diversification our balance Functional believe income business our We to of efforts the base

growing continue margins will Specialty benefit we the American continue XXXX. results believe -- believe global North year from Product polymer market insulation business, Although improve believe we we should we for expect We to materials. to over to will continue challenge full our

the and leadership producer for position Turning amphoteric acquisition. anionic largest merchant the We the in our strengthened western hemisphere to with Slide XX. as Ecatepec BASF, a market surfactants of

continued performance contribute slightly The commodity Although consumer synergies volume the sales XXXX. should the group. Overall, to full our quarter, $X product it minimally growth North American be $X we in the growth in saw strong and for for earnings acquisition the contributed company's by driven acquisition includes million income quarter, in should accretive million to the operating the by cost year. surfactant between

our offset Polyol We in not volumes quarter remain until fourth that European the commodity for we in as margin, to Rigid previously XXXX. year have volumes share polyol believe recover recaptured the of should balance for lower North are anticipated will opportunities partially strong. Global that substantially lost America. the expect volume We business

to strategy. of efforts diversification Our our continue key be long-term component a

of North of significantly, For our continue customers, from strong in remain that Columbus, with by was supported diversification first believe Tier Collaborative local efforts performance strategy. the segment heroes. volume key our X business. our contribute foundation specialty America to is the our will months Tier polyol the first reactor increased consumer Georgia. product optimistic X up year, and a volume the to our our We Sales efforts year, polyol X from long-term diversification We of oilfield the growth. X our new chemistry our months for X% CASE in about and

pipeline. continue polyol a As on to customer technologies our for value-added of the generation base few work leader next excited rigid a advances market, in the in research about our are we developing and

new a in care market launched recently technology fracking wells. patent-pending we oil developed solvent for for previously, use the mentioned As personal and

Our and New focus on year. our this to operational our Jersey restructure deliver to is excellence remain track key plant Fieldsboro, strategy. savings internal on of The efficiency

During approved on resources to higher-margin the markets plan third quarter, polyol seize fixed future our to production we -- production at refocus surfactant assets growth. further our support repurpose reduce German cost, plant surfactant and to a

We our practices, from value also and network and believe create synergies best sulfonation DRIVE that application the Ecatepec of acquisition. opportunities will

delivered record of first reported income. and results we adjusted X Finally, both net months

returned this $XX.X dividends via repurchases our million shareholders thus have year. and We to share far

instructions portion positioned our turn the the This time, questions. for well like call shareholders. over concludes remarks. capture to you, please question At call. opportunities we'd for Christy, We today's to our review of for this the are prepared

Operator

[Operator Instructions].

is of David first Review. Great from line Lakes question of Stratton Your the

David Stratton

looks costs I of as if some to wondering forward what's mentioned you give us going there in into going think what the Surfactants, like was color and on next I quarters. kind and logistics can you

Quinn Stepan

truck in So drivers capacity. for shortage American total specifically, America. is in in the the States. estimates a in and transportation, tight of the also the tight frankly, are about drivers There Quite Europe. The United it's X% XX,XXX which movement very represents Chemistry market Council is market, tank North short truckload there that of U.S.

So are the our are significantly. industry up for as costs logistics logistics the costs

quarter the million. up in approximately about logistics $X was Our Surfactants costs for

David Stratton

million, Got $X And the... yes. you. then

Quinn Stepan

economy is around. that And and anticipate say that relief the is the would logistics stronger, economy costs to see follow-up I industry would would unless the comment turns don't that for just a we as continue be we tight

David Stratton

to and Or you Do main at -- pressures? competitive Great. results And still want some Polymers. color, a looking polyols more of thing seeing you Are impacting please. give that what's little that's there? the the could you then

Quinn Stepan

as from we architects not let MDI and in recovered If a forms demand at business the was take Europe look has insulation first. stacked about me short. Polymer for in PIR and shortage our insulation, building MDI XXXX, alternative European talk while of managers

some base start quarter there, in that with a to anticipate our anticipate in would segment the do that XXXX. we recovery in this talking see beginning not we would We customer So fourth year. of growth

business, look of at down are substantially The we We our in recaptured quarter as of in XXXX due significantly that competitive share at the As pressure. the margins don't see we've U.S. kind margins we've this lost. we've part or improving said, point. first to the

David Stratton

one. Great. And then maintenance in going be How the the is PA last impactful of the to side the business?

Quinn Stepan

magnitude $X of of million... Order to million $X.X

Luis Rojo

yes. million, $X.X to million $X

Quinn Stepan

the Additional in expense quarter.

Operator

next line Seaport with of the question from comes Global Harrison Your Mike Securities.

Michael Harrison

anhydride on phthalic business. Maybe continue just to the

was it a $X.X there bit, were that but mentioned little income that year-on-year. volumes You the million and PA Polymer the on like segment operating in weaker up looks weighed

some margin of behind of you improvement the was think that. dynamics what I mentioned Just the down wondering are up? volume of part but this yield kind

Quinn Stepan

in of shutdown rates the quarter. We quarter due fourth production in PA higher the third benefited to the Yes. in anticipation

building So were we inventory.

up Our is which in increase are supplier were results anhydride, for North phthalic States. year, the flat in some have North into we somewhat yields the the slightly demand the and but quarter. we American in that market, the only also American Overall, benefited of United imports of seen area,

Michael Harrison

prices, of go some in well? have that seen oil the seen prices with PA And up we've increase we as

Quinn Stepan

anhydride many, of way is the we Typically, the traditionally market with years. phthalic sell plus orthoxylene been kind sold has for many that

and X are the orthoxylene for PA So air. materials raw

plus. of inflationary up conversely, environment, your move you may an adding Typically, to a and the may as orthoxylene So bit that in prices some you little to incrementally be tends be prices it margin. margin move be down, losing as

Michael Harrison

on over pretty the then be And good. side, like Surfactant it continues Okay. the functional to business sounds Surfactants

outlook that ag you're demand, get for can as oilfield seeing the as and well in us if and ag momentum on the business Just we you any thoughts wondering give into kind of oilfield. as XXXX the

Quinn Stepan

Yes.

talk So about first oilfield. I'll

we the growth oilfield at new is our presence our that from As look most technology. in of getting market, we're

presence So relatively the in small oilfield the picture big in market.

share we're presenting specifically, is other I the that -- selling we're there's gaining oilfield to biocides the are -- marketplace. with production So And market. for area we guess, new the increased technology in and

So and From momentum those of have other of primarily we Europe business agricultural that kind a perspective, X what carrying would growing the us, anticipate down our is which additional are segment, increased North are over into decrease for XXXX. with the larger the in America seen areas and an we is in slight kind in business Brazil result as economy. a of

So, to business around our customers helping new business our formulations herbicides this area, for we with new develop customers, again, growing in world. intend the to

any associated got crop tailwinds not with have from -- We higher prices.

corn, would have in wheat benefit soybean, the and share and in growth in of new technology then we farmers prices, And So that anticipate incremental pipeline. formulations use greater due would crop would some herbicides we that new XXXX we to customer pesticides. improvement get encourage commodity be our in we hopeful that

Michael Harrison

question Germany last from the plant me down. then on Wesseling, And shut is

maybe expected have means as Just currently? have us plants on a well bit more give you your the and little do just overall for manufacturing plants in detail that the you in footprint what benefits Europe? as Surfactant -- do many Europe How timing

Quinn Stepan

in being Wesseling one of Europe discontinued have that with three October. surfactant today plants Surfactant early in We production at We site them.

making So site. we that are surfactants no longer at

We and term at site. on of support polyol expansion repurposing the those are planning longer to our assets business diversification

less that at or was business. So the Surfactant breakeven business site more

We've Stalybridge with that facility. that site transferred return on we invested business of some our a capital so And to associated that. at our weren't getting

utilization Stalybridge, increased we've U.K. at facility. So our

from X supply So U.K Voreppe plants left Europe are in Stalybridge are a France. in that the surfactant position our and in

Operator

[Operator Instructions].

comes Siegmeyer with question Capital from next Curt KeyBanc Your Markets.

Curtis Siegmeyer

on the I think to happen needs margin...

Quinn Stepan

you're speaker the just on now. Curt, coming

You can your again. question start and over ask

Curtis Siegmeyer

sort And your then margins was that the needs headwinds, margins see leverage mix there? can Sure. trying improvement pull opportunities just Are to on of said of internal business to drive back in I of you the we business, think happen sort to to expectations. kind how of 'XX. think of directionally about compare just improvement you there to quarter them? this but other you'd where wondering how about know in another like to results should what I quarter to get sort or Polymer

Quinn Stepan

all, So done. not had insulations have first are that of in recovery of disappointed of We were we its recaptured marketplace. PIR -- anticipating second XXXX, the have would relative in to somewhat expectations, which European our with it would the has kind half we of the share volume

perspective, frustrated XXXX said in as would didn't So I we're think move that. there a be margin to by XXXX, a little anticipate or margins and margin we disappointed in I a and think, was into I improvement was going improvement a slight From what -- significant we XXXX.

Curtis Siegmeyer

it. Got

acquisitions then on and of forward would front? the be as acquisitions you Year that thoughts your you kind BASF, terms into And how going New of where might what just in of Okay. are head you kind post on active focus

Quinn Stepan

we healthy balance Well, a that sheet acquisition space. positions be in very us have the to active

and specialties care -- business to agricultural of in. in want that our are more terms business, Surfactant be would to to we be working be currently would interested chemistry We're highlight like and interested X the would we and in we so areas in the adding And specifically the would in personal and potentially on. of would oilfield support be kind targets that new platforms inquisitive we'd the that interested

Operator

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

Quinn Stepan

to today. year-end XXXX call. interest and in ownership our for Have to on you you Company. on Thank forward very great much our you. We remarks. your a call We look day. Thank Stepan us reporting joining appreciate Closing

Operator

thank please gentlemen, your ask and that you today. line. for Ladies participation the conclude does disconnect for call conference and you We that your

Stepan (SCL) 24 Oct 182018 Q3 Earnings call transcript