Stepan Co (SCL) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Stepan Second Quarter 2004 Earnings Conference Call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct the question-and-answer session. At that time, if you have a question, please press the "one" followed by the "four" on your telephone. As a reminder, this conference call is being recorded, Wednesday, July 21st 2004.

I would now like to turn the conference call over to Mr. James Hurlbutt, Vice President and Corporate Controller for 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, in certain global and regional economic conditions, and factors detailed in the company's Securities & Exchange Commission filings.

I will now take a few minutes to review our operating results. Net sales for the second quarter of 2004 increased 18%, to 236.3 million, from 200.4 million in last year's second quarter. A 7% increase in sales volume contributed $14.7 million and was seen across all of our business lines.

Higher selling prices added 17.2 million to the sales increase, due to higher raw material costs. The remainder of the increase came from the translation effect of the weaker dollar. Despite the loss of commodities surfactants volume last year, all segments reported higher sales volume. Volume was particularly strong in fabric softeners and polyurethane polyols.

Net earnings going for the second quarter decreased 20% to 3.8 million or 39 cents per diluted share, compared with 4.8 million, or 49 cents per diluted share. Despite the increase -- the decrease in net income, gross profit grew to 30.5 million compared with 30.2 million in last year's second quarter.

However, a 1.5 million increase in administrative expenses is essentially what brought net income down for the quarter. This increase was due to two factors. First, the 2003 second-quarter expenses were reduced by 1 million recovery of a previous legal settlement.

The second factor was an $800,000 increase in deferred compensation expense due to the increase in Stepan's stock price used in computing deferred compensation expense. Furthermore, we reported a foreign exchange loss of 300,000 in the 2004 second-quarter compared with income of 700,000 in the prior-year quarter.

For the first six months, net income was up 11% on net sales increases of 18%. Sales for the first half of the year were positively impacted by a higher selling prices and volume, as well as foreign currency translation contributions.

Increase in net income for the six-month period was primarily due to an improved sales mix and specialty product during the first quarter, which was partially offset by the lower second-quarter earnings.

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

Starting with surfactants, which accounted for approximately 77% of the company's sales during the second quarter. We are particularly pleased with the increases we saw in surfactants volumes and gains that more than offset the volume losses sustained last year. Surfactant earnings were higher due to a 4% increase in volume.

In North America, volume improved across most of our product lines; while in Europe and Mexico, fabric softener volume was the major area of growth. We were able to pass along most of the raw material price increases from April 1st and announce further price increases on most of our products, effective July 1st, which we expect to be equally as effective.

Turning to our polymer segment, which represented 20% of our revenue in the second quarter. Earnings from this segment were down to due to higher raw material prices. It is proved to be more difficult to recover costs on rapidly rising raw material prices used in polyurethane polyols. Some of this had to do with the short supply of diethylene glycol during the second quarter. This supply position has improved, and we expect pricing to stabilize.

Polymer sales volumes rose significantly during the quarter but again the profitability was off due to higher raw material prices. We have increased polyurethane polyol selling prices as of July 1st. Phthalic anhydride earnings for the quarter improved on both higher volumes and margins. And, finally, Specialty Products, which accounted for 3% of the company's second quarter sales, earnings were up slightly on the higher food and gradient sales volumes.

Turning to expenses. Overall operating expenses rose 4% and 5% respectively for the second quarter and first half of 2004. As I mentioned earlier, administrative expenses were up 17% during the quarter due to the prior year legal settlement recovery and higher deferred compensation expense.

Implementation costs from our new information systems in Europe contributed to the increase in year to date administrative expenses. Marketing expenses for the quarter, however, declined 80%, due to ongoing costs containment efforts primarily in the areas of salaries, advertising, meetings and equipment rental.

For the first six months of 2004, marketing expenses were up primarily due to higher marketing expenses in Europe related to foreign currency translations. Research and development costs were relatively unchanged during both periods in 2004. Net interest expense decreased 12% during the second quarter and 9% during the first half of the year, due to a greater mix of bank debt, which has lower interest rates than our fixed rate long-term notes.

Looking at other income. Income for the Philippine joint venture was down during the quarter and first six months, due to a less favorable sales mix. Other expenses were primarily foreign exchange losses that I've already mentioned.

Turning to the balance sheet. Total debt on March 31st 2004 was a 125.1 million, down from 128.4 million on March 31st -- let me correct that -- that's at June 30th 125.1 million versus 128.4 on March 31st. Our total debt to total capitalization at the end of the quarter was 43%, down from 43.7% at March 31st 2004.

Capital expenditures were 6.9 million for the quarter and 13.2 million for the first half of the year. Our capital expenditure projection for 2004 is a range of $32 million to $36 million.

After a good start to 2004, with continued strong second-quarter volume, we had a slight bump in second-quarter earnings due to administrative expenses and foreign exchange. The improving economy had a negative impact on raw material prices; and while we were able to pass along many of the price increases, we will continue to need to do so for the balance of the year.

We are optimistic that we will be able to achieve further recovery due to our successful implementation of price increases on April 1st and further price increases on July 1st for most of our products.

New opportunities and an improving economy should lead to higher sales volume compared to the second half of 2003. Surfactants will benefit from projected higher fabric softener volume, and polymers expect strong demand for polyurethane polyol. 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.

Thank you. Ladies and gentlemen, if you would like to register a question, press the "one" followed by the "four" on your telephone. You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your request, press the "one" followed by the "three." If you're using a speakerphone, please lift your handset before entering your request. One moment please, and we'll take the first question.

Mr. Hurlbutt, there appears to be no questions at this time. I'll turn the conference back to you.

OK. If there's no further questions, I thank everybody for participating today and look forward to reporting back to you next quarter. 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.