Stepan Co (SCL) 2003 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by, welcome to the Stepan second quarter 2003 earnings conference tall.

During the presentation, all participants will be in a listen only mode. Afterwards we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone.

As a reminder this conference is being recorded Wednesday, July 23, 2003.

I would now like to turn the conference over to James Hurlbutt, Vice President and Corporate Controller with Stepan. Please go ahead, sir.

Good afternoon and thank you for joining us.

Before I begin, I would like to comment briefly on forward-looking statements.

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 German and Philippine operations, and certain global and regional economic conditions and factors detailed in the company's Securities and Exchange Commission filings.

I will now take a few moments to review our operating results.

Net sales for the second quarter of 2003 increased by 6% to $200.4 million from $188.8 million reported one year ago. Most of the sales growth was due to higher selling prices and higher sales in Europe which were due to the translation effect of a weaker dollar. The translation effect increased sales by $5.7 million.

Net income for the second quarter decreased to $4.8 million or 49 cents per diluted share compared to net income of $8.2 million or 84 cents per diluted share last year. Gross profit declined $4.3 million or 12%, due to weaker product mix, and higher raw material, energy and freight costs.

For the six months of 2003, net sales increased 5% to $387.5 million, from the $370 million in last year's first half. For the six-month period, higher sales were due to a 1% increase in volume, higher selling prices, and currency translation impacts. Currency translation accounted for $9.3 million of the sales increase.

Net income for the first half of 2003 was $7 million, or 72 cents per diluted share compared with $12 million or $1.23 per diluted share last year. This decrease was due to weaker margins and product mix.

Before I move on, I want to comment on three factors outside of currency translation that impacted our performance in the second quarter and six-month period.

Our pricing increase from April 1st did generate improvement over the weak first quarter of 2003. During the quarter, we saw natural gas prices come down a bit, as well.

However, natural gas prices remain above where they were in the second quarter of 2002. We continue to make progress in our merchant business with the addition of some new customers and products. However, we have seen some of the business we had with large vertically integrated customers go back to internal production.

We now believe these changes have stabilized. However, as a result of these changes, our volumes in the second quarter were flat.

Now I would like to highlight the performance in each of our three segments.

Starting with surfactants, which accounted for approximately 79% of the company's sales in the first half of 2003.

Surfactant earnings were lower based on flat sales volumes, a weaker sales mix and lower margins. A majority of the decline came from North American operations. As mentioned, we did institute broad price increases on April 1st, 2003, and this helped improve the margins over the first quarter, but the price increase did not impact profitability enough to restore it to the levels achieved in the very strong second quarter of 2002.

In Europe, earnings were down due to weaker sales volumes in Germany and higher operating expenses in the form of regulatory costs, higher salary expenses, and currency translation effects.

Turning to polymers which represented 17% of our revenues in the first six months of 2003, polymer earnings improved because of higher sales volumes of polyurethane polyols, as well as some recovery in margins particularly in Europe. Earnings from polyurethane systems improved on higher volumes, however, phthalic anhydride earnings were down on lower volumes.

And finally, specialty products which accounted for 4% of the company the year-to-date sales. Special products volume and earnings were down on the year-over-year basis. This was mainly due to unusually strong sales of pharmaceutical applications in the 2002 second quarter.

Turning to expenses, operating expenses were up 3% during the quarter. The increase in operating expense was mainly due to a 16% increase in marketing expenses caused by reallocating personnel costs from administrative expense to marketing upon completion of the system implementation project in 2002.

Also contributing, was higher reported marketing costs from our European operation. Once again, the European component included unfavorable translation impact.

Deferred compensation expenses were also up, $200,000 during 2003's second quarter, for the six-month period, however, deferred compensation expenses were down $1.9 million.

Research costs were also up during the 2003 second quarter, from higher salaries, maintenance, and the translation effects from our European research. These increased expenses during the second quarter were slightly offset by a 9% reduction in administrative expenses and lower legal expenses due to a $1 million pretax recovery of a previous legal settlement partially offset by increased costs for other claims. Consulting expenses were also lower due to reduced costs associated with our ERP system implementation which was completed during 2002.

Net interest increased 16% due to higher average debt levels and a higher proportion of long-term fixed rate debt compared to variable debt during 2002. The company secured more long-term fixed rate debt during 2002 to lock in current low interest rates for the long-term, although at a higher cost than current short-term interest rates.

Looking at other income, income from the Philippine joint venture declined $725,000 due to lower royalty income, however, equity income remained strong as the joint venture continues to perform well.

Turning to the balance sheet, total debt on June 30th, 2003, was $122.5 million, down from $129.3 million at March 31, 2003. Capital expenditures were $9.8 million for the quarter and $18.5 million for the six-month period. On a pace for a projected range of $38 to $42 million for the full year 2003.

Our long-term debt to total capitalization at the end of the quarter was 38.7%, down from 41.7% at March 31st, 2003.

Looking forward to the rest of 2003, we have made progress with the sequential quarterly improvement in earnings, however, we realize that we still have some work ahead of us. We must improve profit margins and product mix, while restoring top-line sales volume growth.

Our efforts also include the start-up of our new polyol reactor in Germany which came online at the end of the second quarter and did not contribute to the sales results we reported today. And several new fabric softener opportunities in North America and in Europe which still have not played a part in a meaningful way with respect to our results. These initiatives are now up and running and contributing to third quarter results.

If these efforts are successful, we expect improvement in the second half of 2003 over the $8.1 million earned in the prior year second half.

On the acquisition front, we continue to look for synergistic acquisitions or opportunities that support our globalization efforts. Our nearest term priority is for the production of polyurethane polyols in China. However, the SARS disease has delayed progress but efforts continue. We continuously look at other opportunities. However, none of these activities are likely to impact the results for the remainder of the year.

This concludes my prepared remarks. At this time, I'd like to turn the call over for questions.

Operator, please read the instructions for the question portion of today's call.

Thank you. Ladies and gentlemen if you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request.

One moment, please, for the first question.

Our first question comes from the line of Mark Cooper with Benson & Associates. Please proceed with your question.

Thank you.

Can you tell me what the total debt is at the end of the quarter?

Total debt?

Yes.

Yeah it was $122.5 million.

$122.5.

Down from -- we were $129.3 at the end of the prior quarter.

Right. Okay. Thank you.

Sure.

Our next question comes from Beverly Mattinger with Grace and White. Please proceed with your question.

Hi, Jim, I was wondering if you could give us some sort of idea what might be going on on the competitive front? Are there any specific issues other than the big companies taking, you know, some of their production in-house? Because, you know, it's volumes flat out, I'm wondering if there was something else going on in the marketplace?

No.

I mean, traditionally even if you assume we're still in a recession, which I assume many people believe we are, a lot of the cleaning products are not the type of products that people cut back on, other than for logistical consolidations to reduce inventory costs. But the consumer generally doesn't cut back too much. What we're really seeing is the integration of products back into some of the brand-name producers' own facilities.

Obviously that's coming at our expense from product we've produced for them in the past.

We have replaced a significant portion of that volume so that that's why we're not seeing an overall volume decline, but it also means we're not getting the incremental organic growth that we would like to see.

But we do believe that the business that we've lost in the last 12 to 18 months is pretty much stabilized now. We're not anticipating further moves out of our plants into these customers' own production facilities.

Okay.

And then also, on the German situation, the facility there, now that you're up and running do you see that operations out of Germany to be accretive this year or are you going to just see it breaking even perhaps?

We had some -- and that's a polyol expansion. We had some set backs in the surfactant business in the second quarter with some business we temporarily lost which we've regained, so we believe the surfactant business will be back to a profit in the second half. And the polyol business will be profitable from the very beginning. So, yes, we do think Germany will be accretive to earnings in the second half of the year.

Great.

Also then also you mentioned in your little intro about increasing sales or changing the product mix. Can you elaborate on what the company's trying to do there?

Well as we've said in the past, we're, you know, our bread and butter sulfonation products that go into primarily laundry and cleaning products, carry a lower margin than some of our other specialty products for either personal care or industrial cleaning compounds or even in some of the polymer businesses. And so, yes, we're focussed on reinvesting in those products and those productive capabilities that will get us higher margin products.

And I alluded last quarter to the fact that we've had a big push on expanding fabric softener capacity. In a global way.

And we've -- it's successful, it's taking a little longer to get to the volumes we had hoped, but we are significantly larger participant in the fabric softener markets today than we were two other three years ago.

Great, thanks a lot.

Thanks, Beverly.

Ladies and gentlemen, as a reminder to register for a question, press the 1 followed by the 4.

The next question comes from Gary Lindhoff with (Brickulir) Please proceed.with your question.

Thank you. Hi, Jim.

Hi, Gary.

Jim, I think it's the first time I've heard you mention the prospect of the joint venture in China that I think you've been work on for two years or so. Should we read anything into that, that there has been progress and maybe 2004 is the year?

We certainly hope so.

I mean, one way or the other, with or without a joint venture partner it is our intention to be participating in the polyol market in China. And clearly, everything seemed to slow down in China with SARS, and the willingness of people to travel as well as just the pace of which you could get, you know, bureaucratic action moving in China.

But we do see some positive signs recently that we could keep moving forward and get closer to getting a production site up and running. Certainly not in calendar year 2003 at this point, because there's probably a 12-month lead time to build the plant.

But you know, we're very optimistic now that we should press forward one way or the other with getting that polyol capability into China. A lot of manufacturing capacity in China uses these polyol formulations.

We have relationships in other parts of the world with customers who would buy from us in China. So we do feel that's strategically important. And then it also gives us an inroad into a site for surfactant opportunities in China.

Uhm-hmm.

So yes we do plan to keep pushing ahead. It's been slow and frustrating but we do think it's going to result in a opportunity sooner or later.

Can you provide some ballpark idea of what kind of capital you may invest in something along those lines, the polyol opportunities?

Yeah, the polyol opportunity, we would hopefully get some financing in China, but we're probably not looking at more than a couple of million dollars contribution from Stepan Company.

Great.

Can you update us on the Philippines? I believe the tax holiday was set to expire the end of June. What's happening there and as well with the Proctor and Gamble contract?

The Proctor and Gamble contract is secure for another two years in the Philippines.

We diversified the product line in the Philippines, and are now selling -- they used to be virtually the whole capacity of that-- I mean, the whole output of the plant. We have excess - a little bit of excess capacity there but we diversified away from Proctor so we're less dependent than we were at the inception of the joint venture in the Philippines and we are exporting some product outside of the Philippines now and generating dollar revenues.

And then as far as the tax holiday, we are working on an extension, right now we believe we're close to a one-year extension. And if we put a fabric softener plant in, we think we can get the taxing bodies that approve these incentives to give us some additional tax incentives or tax holidays.

Okay. Great.

And last question: Can you just provide us with some idea of where benzene and LAB prices are and where you see them going in Q3 and maybe the second half of the year?

Well, if I knew for sure I'd be a very wealthy man.

But unfortunately, you know, it moves somewhat with crude oil but not always directly on that. On the linear alka benzene doesn't always move directly with benzene.

We're seeing attempts to get price increases through, they're not quite as successful as they've hoped. But you know, if crude oil stabilizes, I think LAB would stabilize.

But, boy, it's been so shaky the last 12 months, I wouldn't want to bet on the direction of raw material costs. Until we see really stability in crude oil. And certainly natural gases, nobody believes it's stable today.

It's come down quite a bit, but I think everybody believes by wintertime it's going to be back up. The question is how far up is it going to go again.

Uhm-hmm.

So right now, we're seeing more stability than we saw certainly in the first and second quarter when things got very volatile. It seems to have settled down a little bit but we're assuming for our internal projections that the -- particularly LAB will be somewhat stable through the balance of the year.

Okay. Great. Thanks very much.

Sure.

Ladies and gentlemen, as a reminder to register for a question, please press the 1 followed by the 4.

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

Okay.

Since there are no more questions I thank you all for joining us today and look forward to speaking with you again in the future. 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.