Stepan Co (SCL) 2005 Q4 法說會逐字稿

Welcome to the Stepan Company's fourth quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS].

I would now like to turn the conference over to Jim Hurlbutt, Vice President of Finance. 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 fourth quarter operating results. Net sales for the fourth quarter of 2005 increased 13% to $270.1 million from $239.4 million from the same period in 2004, an increase in sales volume, higher selling prices and the effect of foreign currency translation accounted for the increase in sales. We increased selling prices to reflect rising raw material costs brought on by the rapid increase in the cost of crude oil.

The fourth quarter resulted in a net loss of 400 -- $0.4 million, or $0.07 per diluted share, compared to income of $0.6 million, or $0.04 per diluted share a year ago. Contributing to the lower net income were a decline in Philippine joint venture income of $1.4 million, a $1 million reduction in foreign exchange gains included in other income. These items were partially offset by a favorable $2 million reduction in income tax provision due to new income tax credits in bio diesel production and improved utilization of foreign tax loss carry forwards. Operating income increased to $64,000 for the fourth quarter of 2005 from $43,000 for the same period in 2004.

For the full year of 2005, I am proud to say that net sales increased 15%, reaching the $1 billion mark at $1.1 billion from $935.8 million in 2004. Sales were positively impacted by higher volume. Selling price increases and foreign currency translation contributions. Full year 2005 net income grew by 27% to $13.2 million, or $1.35 per diluted share, from $10.3 million, or $1.05 per diluted share in 2004. Gross profit also increased by 11% as a result of growth in both polymer and surfactant earnings.

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 sales for the company in 2005. Surfactant sales increased 19% in the quarter and 16% year over year, due to higher selling prices and an increase in volume, the volume was primarily due to sales of biodiesel fuel in the U.S. and volume gains in Latin America and in the U.K. Surfactant earnings also improved due to increased biodiesel and fabric softner sales and the European earnings improved due to the closure of competitors plant and a $1.4 million net gain from insurance recoveries related to equipment destroyed by a fire in 2004 at the Company's plant in the U.K.

Turning to our polymer segment, which represented 21% of our revenue in 2005, we saw polymer sales decline by 3% in the fourth quarter, due to lower polyurethane polyol demand, and production problems in our Illinois phthalic anhydride plant. Year over year, we saw a sales improvement of 15%, due to higher selling prices, polymer earnings declined in the fourth quarter due to the phthalic anhydride production problems and lower polyurethane polyol volume. The full year earnings improved however, due to price increases implemented to recover higher raw material costs.

Finally, specialty products which accounted for 3% of the company sales in 2005, decreased by 8% compared with the 2004 fourth quarter and decreased by 3% year over year due to the lower food ingredient volume and competitive pressure impacting profit margins.

Turning to expenses, the increase in marketing and research expenses largely due to higher salary, healthcare and pension expenses while general administrative expenses declined during the fourth quarter, increased expenses and deferred compensation and research resulted in a 6% increase in overall operating expenses in 2005.

Looking at other income, interest expense increased due to higher average debt levels and higher short term interest rates. Regarding our Philippine joint venture, income declined by $1.4 million during the fourth quarter due to lower sales volume and a market shift to lower margin products. A new fabric softner reactor currently under construction in the Philippines will not benefit earning until the second half of 2006.

Turning to the balance sheet, total debt as of December 31st was $125.7 million, up from $112 million at the end of 2004. A total debt to total capitalization at quarter and year end was 43%, up from 40% at the same time last year. Capital expenditures were $12.4 million for the fourth quarter, and $41.5 million in 2005. During 2006 capital spending will continue at roughly the pace of the fourth quarter of 2005.

Looking ahead, we expect continued improvement in surfactant earnings, polymer volume is expected to gradually improve throughout the year, high crude oil and natural gas prices have led to increased costs for all of our business segments, all of our price increases have helped to recover these costs. Bio diesel capacity expansion undertaken last year should be completed by the end of the first quarter of 2006, and construction of our Philippine joint venture's fabric softener plant should be completed during the quarter. We also have cost containment initiatives underway to help drive a higher return from our business. We look to further full year earning growth in 2006.

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

[OPERATOR INSTRUCTIONS]. One moment please, for our first question. And it comes from the line of [Barely Mactinger from Grayson White]. Please proceed.

Hi, Jim. I was wondering if you were doing any hedging for the natural gas pricing.

We've done forward buying. We were -- we had a pretty good program going. We internally were a little bit aggressive on holding off and it probably hurt us. We've gone back to our former model and brought out a little higher percentage going forward. Perspectively we are going to be a little safer and more cautious and have the amount of forward gas we have under contract, so we don't get caught with some of the volatility we saw in the fourth quarter of last year.

My other question was about the raw material pricing. Every day the price is up and down and all around. I was wondering what you were seeing from your suppliers as far as a trend. Has it stabilized? Is it continue going to up? Is there any relief? Can you give us some feedback on that?

It's a little bit of a mixed bag. Obviously, crude is very volatile which is going to continue to affect our polymer segment the most because of the orthoxylene and diethylene glycol used in our polyol products. So that one is a little tougher to look out and have any confidence in in. We are seeing more capacity coming on line in some of our surfactant feed stocks.

And some flexibility, in other words, in the detergent markets they do have the option of moving between linear [alcobenzene] and some of the alcohols to get to a surfactant. That is putting a little more pressure on them to compete with the feedstocks and as more capacity comes along for some of the alcohol based feed stocks we are anticipating some relief, although we are seeing limited downward pressure right now but at least we are not seeing, compared to last year, we are not seeing upward pressure which is, that's the most important factor for us right now.

Also the phthalic anhydride plant that had the fire, are you going to be able to recover anything in insurance and also is that plant now up and running back at normal?

No, the plant is up and running at normal throughput capacity. There is, the total insurable claim is below our deductible. However, we have gone back to the electrical provider with a claim and are in active negotiations for the recovery of a portion of those costs. So we hope, we did not record any receivable or contingent recovery in the 2005 results. So we are fairly confident there will be some recovery. Is it going to be as large as we would hope? It's premature to say.

Okay. That's it for me.

Okay. Thanks, Barely.

Thank you.

[OPERATOR INSTRUCTIONS]. Mr. Hurlbutt, there are no further questions at this time. I will turn the call back to you.

I want to thank everybody for participating in today's call. 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. Thank you.