Stepan Co (SCL) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2004 earnings conference call. 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, October 20th, 2004. I would now like to turn the conference over to Mr. James Hurlbutt, VP &Corporate Controller of Stepan Company. Please proceed sir.

Good afternoon and thank you for joining us. Before I begin, please note that information on 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 third quarter of 2004 increased 22% to $238.7m, from $196.1m from last year’s third quarter. An 8% increase in sales volume contributed $15.1m of the increased net sales. Higher raw material prices contributed $23.1m to net sales and the translation effect from the weaker dollar, accounted for the remaining $4.4m increase in sales.

The volume increase was primarily driven by strong volume growth in North American surfactants as well as strong performance throughout all of our polymer product lines. Higher raw material prices were seen in all three of our segments. This led to gross profits declining 3% to $26.2m, compared with $26.9m in last year’s third quarter.

Now gross margins in our North American markets were up, the improvement was more than offset by a significant decline in European growth due to escalating raw material prices. Despite the reduced gross margins, operating income rose 34% to $4m, from $3m, primarily as a result of lower administrative expenses.

Our administrative expenses declined $2.2m, of which $1.5m was associated with a pretax charge with potential environmental remediation costs taken into 2003. Deferred compensation planned income (indiscernible) $1000 also contributed to lower administrative expenses due to a decrease in step and stock price, used in computing the deferred compensation liability.

Net earnings for the third quarter increased 46% to $1.9m or 19 cents per diluted share, compared with $1.3m or 12 cents per diluted share last year.

Sales for the 2004 nine-month period were up 19% and we’re positively impacted by higher selling prices, volume increases, as well as foreign currency translation contributions.

For the first nine months of 2004, net income was up 17%. The increase in net income for the nine-month period was primarily due to higher North American sales volume and an improved gross margin due to a more profitable product mix.

Now, I would like to highlight the performance in each of our three segments starting with surfactants, which accounted for approximately 75% of the company’s sales during the third quarter.

Surfactant earnings were 14% lower due to our inability to pass through price increases in a very competitive European marketplace. During September, there was a fire in the Stalybridge, UK Plant that impacted one piece of equipment and a very small portion of the plant’s capacity. The replacement of the equipment is covered by insurance and we have business interruption insurance coverage.

The interruption had minimal impact on third quarter earnings. Even though we had increases in North American volumes and earnings, we are challenged by escalating raw material and freight costs.

Turning to our polymer statement, which represented 23% of our revenue in the third quarter, we saw a rise of 13% in polymers during the quarter, which led to a 30% increase in earnings. Most notably our phthalic anhydride earnings improved due to higher volumes and higher margins, recovering a portion of the past margin declines.

Our polyurethane polyols sales volume and earnings showed improvement during the quarter.

And finally, specialty products, which accounted for 2% of the company’s third quarter sales, earnings were down 40% due to lower volume and some high margin pharmaceutical products. Some of this volume was due to order delays that were pushed out until the fourth quarter.

Turning to expenses. Overall operating expenses declined 7% for the quarter and were flat for the first nine months of the year. As I previously mentioned, [Indiscernible] 2.2 million due to lower environmental remediation charges and reduced deferred compensation expense.

R&D expenses were up 11%, as we continue to look for new product opportunities. The increase in R&D expenses is due to the testing and registration of biofinal products as well as increased costs relating to developing Polyamino technology in our surfactant product line

Looking at other income, interest expense was down once again due to greater mix of bank debt which is the lower interest rates than our long term loans income for the Philippines (indiscernible) was down during the quarter and first 9 months due to weaker mix lower margin products.

Turning to the balance sheet, total debt on September 30th 2004 was $131.9m up from $125.m on June 30th. Our total debt – our total capitalization at the end of the quarter was 44.1% up from 43% for June 30th 2004. Capital expenditures were $10m for the quarter and $23.2m for the first 9 months of the year. Our capital expenditure projection for 2004 is a range of $32m to $36m.

Looking ahead, we expect sales volume to remain strong during the fourth quarter. So far we have seen strong demand for our polymer products which is a continuation of improved trends in poly-urethane polyols sales line. Additionally where we have high orders from our pharmaceutical customers for specialty products during the fourth quarter, which was shifted from the third quarter. We (indiscernible) on higher raw material cost to our customers. We have initiated an additional selling price increase for the fourth quarter. You know our European business is expected to experience weaker margins. Global sales line forecast continues to show improvement over last year.

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 please press the one followed by the 4 on your telephone. You will here a free tone (indiscernible) at your request. If your question have been answered, if you would like to withdraw your registration please press the one followed by the 3. If you are using a speakerphone please lift the hand set before entering your request.

One moment please for the first question. Our first question comes from the line of Beverly Manchester of Grace and White Company, please proceed with your question.

Thank you. Hi Jim.

Hi Beverly.

I wanted to ask you a little bit about the surfactants volume increases and if you could be – or perhaps tell us a little bit more where they are coming from? Is it new customers, new program and do you feel that you’ve recovered some of the lost business that went in-house last year?

The North American sales line surfactant has definitely replaced the loss on sales on a comparative quarter basis. So we’ve made up quite a bit of ground. And a lot of it is a good sales mix we’ve picked up a lot of functional products on diverse markets outside of the traditional laundry and cleaning area. So but we’ve also been pursuing new opportunities in laundry and cleaning at a broader customer base. And fabric softeners continues to grow for us in terms of volume both – well really throughout all of North America as well as Europe but significant growth was in North America in 2004.

When you say growth outside the traditional laundry and cleaning business can you be a little bit more specific about what those other businesses would be?

Yes the one business that’s been strong for us this year is the polymer and foamer applications, which are used in things like chips and board concrete, oil field drilling lubricants. You know these are the applications that have higher margins than the traditional more commodity laundry detergent markets. And this is narrowly focused for growth and we’ve been seeing some success this year.

Great and also if you could talk a little bit more about the European competition and I would think -- cause you mentioned that it’s hard for you to counsel on some of these raw material prices overseas. But I would think all of your competition was facing the same issue and why would this not be sort of every one trying to increase their pricing?

Well we would love to see people using logic and rational thinking that isn’t always the case. The one distinguishing feature though between the European market and the US market we are a major market share in North America and we basically a converter of raw materials in the finish product. We compete in Europe on a slightly different footing. Some of the surfactant producers in Europe or several of them are more vertically integrated. So they have a significant interest in keeping their commodities whether it’s alcohol or linear hyclobenzine they don’t -- they want to move those products. And if need be they will absorb some of the price increase in the finish surfactant. So it makes us – we’re not quite in each market with in Europe on a level playing field cause we do not have a vertically integrated position on some of those raw materials.

Okay great thanks.

As a reminder if you would like to register for a question please press the one followed by the 4 on your telephone keypad. There are no further questions at this time. I will now turn the call back to you, please continue with your presentation.

I just wish to thank you all for participating in today’s call and look forward to it in the future, thank you.

Ladies and gentlemen this does conclude this conference call for today. We thank you for your participation and ask that you please disconnect your lines.