Stepan Co (SCL) 2005 Q1 法說會逐字稿

Ladies and gentleman, thank you for standing by. Welcome to the Stepan Company First Quarter 2005 Earnings Conference Call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded Wednesday, April 27th, 2005. I would now like to turn the conference over to Mr. James Hurlbutt, VP of Finance for Stepan Company. 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 first quarter of 2005 increased 19% to 264.3 million from 221.4 million for the same period in 2004. Higher selling prices increased sales volume in the translation effect from the weaker dollar accounting for the increase in sales. Net income decreased to 3.2 million, or $.33 per diluted share for the first quarter compared with 4 million, or $.42 per diluted share a year ago. Net income also included two items that had the net effect of increasing earnings by $300 thousand. Insurance proceeds of $600 thousand after tax related to a fire in the UK in 2004 increased income, while income attributable to deferred compensation plan obligations declined by $300 thousand net of tax.

Gross profit increased slightly to 29.8 million due to strong polymer volume that offset weakness in specialty products.

Operating income decreased from 8 million for the first quarter of 2004 to 6.9 million for the first quarter of 2005 primarily due to higher operating expenses.

Now I would like to highlight the performance in each of our three segments. We begin with surfactants, which accounted for approximately 76% of the company's sales for the first quarter of 2005. Surfactant sales increased 14% from higher selling prices and a 4% increase in volume. However, surfactant earnings declined due to a higher research expenses, a weaker sales mix in North America and lower margins in Europe. Higher utility costs driven by the rise in natural gas prices also contributed to the lower earnings.

Turning to our polymer segments, which represented 22% of our revenue for the first quarter of 2005, we saw polymer sales rise 53% in the first quarter due to higher selling prices caused by continuing raw material cost increases. Sales volume grew by 5% and earnings also improved as a result of the higher volume and improved sales mix. This lead to a 51% increase in operating income. Higher margin polyurethane polyol volume growth was partially offset by a decline in phthalic anhydride volume due to a plant shutdown in March for maintenance.

Finally, specialty products which accounted for 2% of the company's first quarter 2005 sales, declined 27% stemming from unusually low flavor in pharmaceutical volumes. They are both expected to recover over the balance of 2005. Earnings for this group were lower as a result of the lower volume of these high margin products.

Turning to expenses. Our operating expenses increased by 6% during the first quarter due to pension and health care costs and higher research costs. The 21% increase in research costs stems from consulting on new technologies, increased biocidil testing and laboratory renovation expenses. Researchive spending is expected to moderate over the rest of the year. Administrative expense declined due to lower outside legal costs and reduced system implementation costs following the 2004 completion in Europe.

Looking at other income, interest expense decreased due to a higher mix of short-term debt at lower interest rates. Regarding our Philippine joint venture, we incurred a loss during the first quarter due to an adverse change in product mix. Our results should improve during the course of 2005.

Turning to the balance sheet, total debt for the quarter stood at 144.9 million, up from 112 million at the end of 2004. Higher working capital requirements led to the seasonal increase in debt as year-end receivables were very low. Our total debt to total capitalization for the first quarter of 2005 was 46.3%, up from 43.7% last year. Capital expenditures were 8.2 million for the quarter. Our capital expenditure projection for 2005 in the range of 40-46 million.

Looking ahead, business conditions look positive for the rest of this year. While specialty products have started off weakly, we expect earnings from the segment to recover in the second quarter. Surfactant sales grew over the quarter and we have been successful in recovering higher raw material freight and natural gas costs in North America though we have met greater resistance in Europe. Surfactants will be increasing its sales of biodiesel over the balance of the year. Demand for polymers also looks very strong for the balance of the year. We are confident we can achieve full-year earnings growth.

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. [OPERATOR INSTUCTIONS] The first question comes from the line of Beverly Manchester from Grace and White. Please proceed with your question.

I was wondering if you could talk a little bit more about surfactant business in Europe and whether or not this weakness you are seeing is customer related or is that just a general economic condition situation?

Well, we have an unsual situation going right now in Europe. Generally prices are being increased to cover higher raw material cost but not at a fast enough rate to get our margins back to where they were say a year, year and a half ago.

Compounding the problem is a situation where one competitor has a plant in the United Kingdom that they plan to shut down by mid-year. This should be a good sign for us but what we are seeing is they're not raising prices as they try to keep that plant full for the balance of their operating period through mid-year so they want to make sure they are covering overhead. We hope that's a temporary problem, you would think that less capacity in the UK would certainly be beneficial to us over the long-term. We believe that their-- that that site is the only major merchant competitor in the UK for us, so barring significant imports from the continent of Europe we would hope there will be some reasonable chance of getting our margins up in the UK which is where we've seen most of the weakness in the last six months.

Okay. And then if you could talk a little bit more about the surfactant business in general. Overall your margins still are not where they've been and if anything, year-over-year they're kind of weak – weaker. Can you just give us a little idea what's going on there as far as your product mix, are you not being able to push through more value-added, clearly price that you've been able to raise prices across the board but overall they don't seem to be bringing your margins back up to where they've been.

Well, we've been in successful in North America with price increases across almost all product categories. Where we've seen some slowdown in mix we've had a slight deterioration in mix, our distribution volume of higher margin products has been a little sluggish where we've had growth in other product lines, but the higher margin distribution business creates a mix issue where we have less favorable mix coming in, but overall the price increases have been sticking in North America. But our costs have been going up as well; we've had higher pensions costs, higher health care costs.

Yeah but those are below the gross margin—those are more operating, even your gross margins still haven't recovered.

Well we have those costs in our plants as well.

Oh okay.

So when you talk about our gross profit line, that's gotta cover the health care costs at the manufacturing sites and the pension costs at the manufacturing sites, the natural gas costs at those sites, so—but I think we are pretty confident that the prospects for the balance of the year in North America look fairly strong. We’ve got additional volume coming with our biodiesel participation this year, we had very low volume in the first quarter as we ramped our plant up in anticipation of the strong balance of the year in biodiesel, that will certainly help spread more overhead out over a broader product portfolio.

So, I think the chance for margin improvement in North America continues to be strong for the balance of the year. Hopefully we would see the same effect in Europe, particularly with less competition in the UK.

[OPERATOR INSTRUCTIONS] It appears at this time there are no further questions.

Okay. I just wish to thank everybody for participating in today's call. Thank you.

Thank you ladies and gentlemen. This does conclude the conference call for today and we thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.