Stepan Co (SCL) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter and Year-End Results Conference Call. (Caller Instructions.) As a reminder, this conference is being recorded Thursday, February 10, 2005. I would now like to turn the conference over to Mr. James Hurlbutt, Vice President of Finance. Please go ahead, sir.

Good morning, 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 fourth quarter of 2004 increased 19 percent to $239.4 million from $201.3 million for the same period in 2003. Higher selling prices due to increased raw material costs contributed $32.5 million to net sales and the translation effect from the weaker dollar accounted for the remaining $5.6 million increase in sales. Overall, margin weakness in Europe, coupled with weaker surfactant volume, adversely affected the fourth quarter. Net income rose to $600,000 or 4 cents per diluted share for the fourth quarter, compared with a loss of $3.4 million or 41 cents per share a year ago.

Gross profit improved 14 percent or $3.1 million, mainly a result of a 13 percent increase in polymer volume. Surfactant gross profit also increased in North America and Latin America, but was more than offset by a larger decline in Europe as a result of continuing higher costs for raw materials.

Operating results improved from a loss of $5.8 million in the fourth quarter of 2003 to roughly breakeven for the current quarter. The improvement is due to a $3.1 million improvement in gross profit and a $2.7 million reduction in cost, largely attributable to charges recorded in the fourth quarter of 2003 for an asset impairment, severance, and higher deferred compensation expense. The deferred compensation plan results in expense when the price of Stepan Company stock increases.

Other income included $1 million of foreign exchange gain, which substantially offset losses incurred during the first three quarters of 2004. This results from the sharp fluctuations in the value of the U.S. dollar. The income tax provision benefited from a lowering of tax reserves by $300,000 after the conclusion of an audit of U.S. income tax returns for the period of 2000 through 2002.

Sales for the full year 2004 were up 19 percent to $935.8 million from $784.9 million the prior year and were positively impacted by higher selling prices, a 5 percent volume increase, and foreign currency translation contributions. Full year 2004 net income doubled to $10.3 million or $1.05 per diluted share from $4.9 million or 45 cents per diluted share in 2003. Gross profit also increased by $7.2 million or 7 percent as a result of the growth in polymer volume.

Now I would like to highlight the performance in each of our three segments. Let's start with surfactants, which accounted for approximately 76 percent of the Company's sales for the full year 2004. North American surfactant sales mix and volume improved resulting in a 14 percent improvement in operating income. Latin American income rose on improved fabric softener volume. This improvement was more than offset by deteriorating profit margins and the difficulty of recovering higher raw material costs in Europe as a result of excess industry capacity and heightened competition.

Turning to our polymer segment, which represented 21 percent of our revenue for the full year 2004, we saw polymer volumes rise 17 percent in 2004, which led to a 31 percent increase in operating income. Higher volume and a partial recovery of prior margin erosion led to significant earnings improvement in both phthalic anhydride and polyurethane polyol.

And finally, specialty products, which accounted for 3 percent of the Company's full year 2004 sales, showed improvements over the course of the year. Operating income for specialty products rose 17 percent on improved sales volume in the pharmaceutical and food ingredient markets.

Turning to expenses, overall operating expenses declined 2 percent for the full year 2004. Administrative expense was down $3.4 million. Prior year administrative expense included a $2.1 million environmental remediation charge and severance costs of $900,000. Also within administrative expense, deferred compensation decreased by $1.3 million.

R&D expenses were up 5 percent for the year as we continue to focus our efforts on innovations into new markets or higher margin applications in existing markets. Current high priority projects include a polymer for the flexible film market and surfactants for use in soap bars.

Looking at other income, interest expense decreased 10 percent from the prior year due to a higher mix of lower interest rate short-term debt. Other income declined as gains from foreign exchange of $1.7 million in 2003 dropped to a loss of $100,000 in 2004.

Turning to the balance sheet, 2004 year-end debt was $112 million, down from $115.7 million at the end of 2003. Our total debt to total capitalization at the end of 2004 was 40 percent, down from 41.6 percent at the end of 2003. Capital expenditures were $10.6 million for the quarter and $33.8 million for the full year. Our capital expenditure projection for 2005 is a range of $42 to $47 million.

Looking forward, polymers are experiencing strong demand and greater global market penetration. Our Chinese polyol joint venture should be operational by mid-year. We continue to look for opportunities within the surfactant business, particularly focusing on soap bars, agricultural chemicals, and fabric softeners, including developing a new fabric softener plant at our Philippine joint venture.

In North America, business fundamentals look good for both surfactants and polymers. We also expect European surfactant margins to improve over the course of 2005 as we recover the higher raw material costs, coupled with the plant shutdown of one of our largest competitors in the United Kingdom.

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. (Caller Instructions.) Our first question comes from the line of Beverly Manchester of Grace and White. Please proceed with your question.

Hi, Jim. I have a couple questions. First, raw material costs. Clearly, you've been, you know, raising prices to offset those rising costs. Can you give us some idea where those costs are headed or are they--have they stabilized? Do you see any kind of decline or increase coming down the road? Can you just give us some feel on that?

We've had very mixed signals, unfortunately. We've seen, you know, as with crude oil bouncing up and down, we saw some price decreases announced for January, and then, suddenly followed by announcements of increases coming back the other way in February. So it's a very tenuous situation right now. Our own internal feeling is that we hope we've seen the peak of the volatility by the end of last year, and at least stability would be a good thing for us in terms of getting our margins back to where we want them to be. But we'd like to be optimistic that we're actually going to see some declines over the course of the year. It would seem to us that it would be more likely we would have declines than continuing increases. But because of the volatility of crude oil that's very hard to predict.

Is your pricing now stable or do you think you can possibly push some more price increases to your customers?

Well, we would still like to, you know, in--we did a fairly good job of recovering all of our raw material cost increases in North America. We were much, much less successful in Europe and that's where we've got to get our pricing up further, in Europe. Not that we won't be looking for selective opportunities for price increases in North America. But particularly Europe, we will be raising prices.

And can you give us a little bit more feedback on what's happening in your polymer segment. I mean, you had really outstanding growth and I was wondering if this is coming from new products, customers. I mean, what has stimulated this demand?

There's been two factors. One is just the whole industry-wide demand has surged forward. We see two things going on. In addition to just all our end use markets having very strong economic conditions, we do think there was some benefit in the fourth quarter of all of the repair work due to the hurricanes in Florida. A lot of our polyol goes into slab stack insulation for the roofs of flat roof warehouses. And, you know, there was a lot of roof damage in the southeast as a result of the hurricanes. And there has also been a pent-up demand. When the economy wasn't doing so well, people were deferring replacing roofs. And we're seeing much higher roof replacement.

And it's not just driven by pent-up demand. The higher energy prices encourage people to put more foam insulation on the roofs of their buildings because they save money. They can get a payback, actually, from that investment through lower heating and air conditioning costs. So just all of those factors combined plus our greater global market penetration in Europe. And, you know, we are shipping to China from the U.S. in advance of our Chinese plant being up and running. So we are close to sold out in our capacity, not just in polyols within the polymer group, but also in phthalic anhydride, which has had a solid surge in demand with the first real margin improvement last year that we've had in many, many years.

So, you don't see any letdown going into 2005?

No, our business manager in that area is very optimistic that 2005 is going to be a very solid year for the polymer group with improved earnings.

Okay. I'll pass it along to the next person.

Okay. Thanks, Beverly.

(Caller Instructions.) Mr. Hurlbutt, there are no further questions at this time. I will now turn the conference back to you, sir.

I just wish to thank everybody for joining us today on this conference call and look forward to talking to you again in the future. Thank you.

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