Stepan Co (SCL) 2004 Q1 法說會逐字稿

Welcome to the Stepan first-quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Wednesday, April 28, 2004. I would now like to turn the conference over to James Hurlbutt, VP and Corporate Controller of Stepan. Please go ahead, sir.

Good afternoon, and thank you for joining us. Before I begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including but not limited to, prospects for our foreign operations 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 minutes to review our operating results. Net sales for the first quarter of 2004 rose by 18 percent to 221.4 million from 187.1 million reported one year ago. During the quarter, our sales volume rose 2 percent. Most of the sales increase was due to higher selling prices resulting from higher raw materials costs. Foreign currency translation contributed 8.5 million to the increase in sales. Net earnings for the first quarter increased 76 percent and came in at 4 million or 42 cents per diluted share compared with 2.3 million or 23 cents per share in last year's first quarter. The significant increase in earnings for the first quarter was due to an improved sales mix from our higher margin specialty products segment. Sales and earnings were also up in our other two segments.

Now I would like to highlight the performance in each of these segments. Starting with Surfactants, which accounted for approximately 79 percent of the Company's sales during the first quarter, surfactant earnings were higher with both North America and Europe contributing to the improved performance. Earnings in North America increased due to a more favorable sales mix and the impact from our cost containment efforts. Sales to customers, who are distributors, recorded significant improvement in volume and earnings. These distributors resell our products to a large, diverse customer base. North American surfactant volume declined 5 percent due to lower commodity laundry and cleaning product sales volume.

Turning to our Polymers segment, which represented 17 percent of our revenue in the first quarter, polymer earnings increased significantly on an 18 percent increase in volume. The largest contributor to the increased earnings was polyurethane polyols, which experienced higher volumes and benefited from the internal production economics in our new polyol reactor in Germany. Phthalic anhydride earnings were basically flat. A 45 percent increase in volume led to increased earnings from our Polyurethane Systems business.

And finally, Specialty Products, which accounted for 4 percent of the Company's first-quarter sales, was the largest contributor to the overall increased earnings. Earnings from Specialty Products doubled during the first quarter. Higher volume was the driver, as two of our pharmaceutical customers ordered a disproportionate amount of their annual requirement early in the year. Outside of this anomaly, volume end earnings from our remaining food ingredients products were very strong during the first quarter.

Turning to expenses, overall operating expenses rose 7 percent. However, North American operating expenses declined during the quarter, mainly due to ongoing cost containment efforts. Europe accounted for most of the overall increase in operating expenses due to two factors, the largest part was increased marketing expenses, mainly from the effect of foreign currency translation; and secondly, within administrative expenses, there was 6 million of cost associated with increased information systems implementation. Net interest expense decreased 6 percent during the first quarter due to a greater mix of bank debt, which has lower interest rates than our first fixed -- than our fixed rate long-term notes. As expected, we are in full compliance with our amended U.S. loan agreements. Looking at other income, income from the Philippine joint venture rose slightly from the prior year. Other expense included foreign exchange losses, primarily on dollar-denominated liabilities of our European business.

Turning to the balance sheet, total debt on March 31, 2004 was 128.4 million, up from 115.7 million on December 31, 2003. Overall debt levels rose for the quarter due to an increase in receivables as business conditions have improved. Capital expenditures were 6.2 million for the quarter. Our capital expenditure projection for 2004 is in a range of 28 to 32 million. Our total debt to total capitalization at the end of the quarter was 43.7 percent, up from 41.6 percent at December 31, 2003.

Now for guidance. After a difficult 2003, we are pleased that all business segments reported higher sales and earnings for the first quarter of 2004. We are optimistic that the overall economy is improving, and more importantly, that we can execute on opportunities to grow our business during 2004. Prospects for surfactant volumes in Europe look very strong. North American surfactant volume, excluding the commodity business that we lost last year, is growing and much of the growth is targeted for higher value-added products. Sales of fabric softener and agricultural chemicals, as well as the sales to our distributors, are all projecting a much stronger year over 2003. Polymers looks to be on track for improved volumes and earnings. And we are projecting a strong year from specialty products on improved volume. As a result of rising raw materials costs, we have implemented price increases on April 1 on most of our products. In the end, we expect to see significant improvements in 2004 compared to 2003.

This concludes my prepared remarks. At this time, I would like to turn the call over for questions. Operator, please read the instructions for the question portion of today's call.

(OPERATOR INSTRUCTIONS). John Roberts, Buckingham Research.

The total volume for the Company is up 2 percent. North American surfactants are down 5 percent. Was the overall surfactant portfolio roughly flat, let's say? And could then you comment on how big is the distributor business and how much that was up?

Yes, the distributor business was up approximately 10 percent. Domestically, we were still down in volume because of some of the business we lost last year. But Europe had a strong surfactant first quarter. But volume wise, in total, surfactants was probably relatively flat, but the increase is (ph) coming in the distributor business and the ag side and some of our functional products on the surfactant side are starting to gain ground again and make up for the lost business last year.

What was the volume number for Europe, was volume up 5 percent in Europe or --?

No, it would be -- it's over 10 percent increase in volume in Europe.

Okay. And then secondly, Jim, do you have a raw material cost index or any way to sort of calibrate how much your average raw materials costs were up in first -- you know, March quarter over March quarter?

I don't have an index handy, but they're certainly been rising significantly. We had a significant increase last year in the first quarter because of the war, and then again this first quarter, obviously, with crude oil shooting up. So I don't have a percentage comparison for you. But I think the difference, at least for our performance, is that we have had an easier time making sure to recover those raw materials costs in our selling prices than we did in the first quarter of last year.

Is it fair to say though the end of the March quarter was about the same as the average in the March quarter? Things at least have plateaued here a little bit?

Yes, I think so. I think that's a fair statement.

Beverly Machtinger, Grace & White.

I was wondering -- I know over the past few years, the German operations have been a real drain. And now that you've changed over to a polymer facility, is that facility now profitable to the company?

The total facility is profitable, but it's being driven by the polymer contribution. The surfactants is still faced with overcapacity in -- particularly in that part of Europe and the -- we have diversified the product mix but the volumes of the higher margin products aren't large enough to make up for the poor contribution from the commodity side of the surfactant business in that plant. Our goal is to continue to move away from the commodities with that facility and push more higher value-added surfactants through that facility. So yes, the polymer business picking up a good share of the overhead in that plant -- is certainly giving us a total profit for Germany. But we certainly have a lot of opportunity to make that a better operation by improving the surfactant side.

Okay. And also, could you talk a little bit more about the increased volumes coming from the domestic situation? Because I know we have talked that, with the loss of the two big customers, that kind of put a crimp in things, and now you're saying you're getting better volumes from the higher-margin products. Are those coming from the same customers, just getting different products? Or are you addressing a whole new customer base with these products?

No, it's our existing customer base. But with the economy improving, we're seeing better volumes across the board. And with -- you know, we have always been pushing for greater market share in the fabric softener business, and that's been helping this year's results, increased fabric softener volume. What we call functional or industrial products have been doing very well this year. The agricultural products, the -- what we call polymer foamers (ph) that go into latex coatings and gypsum board as an additive to make gypsum board. These segments are all doing much better this year.

Great. Thank you.

(OPERATOR INSTRUCTIONS). 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 closing remarks.

Since there are no further questions, I'd like to thank you all for participating in our call today, and look forward to talking to you again in the future. Thank you.

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