Stepan Co (SCL) 2006 Q1 法說會逐字稿

Welcome to the Stepan Company first quarter earnings results conference call. Afterwards we will conduct a Q&A session. [ OPERATOR INSTRUCTIONS ] This conference is being recorded Wednesday, April 26, 2006. I would now, like to turn the call over to James Hurlbutt, Vice President of Finance.

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, certain global and regional economic conditions and factors detailed in the Company's Security Exchange Commission filings. I will take a few minutes to report our operating results. Net sales for the first quarter of 2006 increased 10% to 289.6 million from 264.3 million for the same period in 2005. Higher selling prices and a 3% increase in sales volume accounted for the increase in sales.

We have increased selling prices of our products over the past year to reflect price increases brought on by rising raw material costs, primarily the rapid increase in the cost a of crude oil. Net income for the first quarter was 3 million or $0.39 per diluted share compared with net income of 3.2 million or $0.33 per diluted share a year ago.

Results of our deferred compensation plan lowered net income by $1.2 million or $0.12 per diluted share. Gross profit improved by 8% to 32.3 million. Operating income decreased 10% to 6.2 million for the first quarter of 2006 from 6.9 million for the same period in 2005. Excluding deferred compensation expense, operating income would have been increased 1.4 million or 22%. Now, I would like to highlight the performance in each of our three segments. We begin with surfactant, which accounted for approximately 78% of the Company's sales for the first quarter.

Surfactant earnings rose modestly on improvement in Latin America and Europe that exceed weaker North American results. Latin America's earnings growth resulted from improved sales volume of fabric softener. European earnings improved due to 17% increase in sales volume of sulfonated products. North American earnings declined due to slightly lower sales volume coupled with higher natural gas and other operational costs including higher costs associated with a labor dispute at our Fieldsboro, New Jersey plant. Contribution from sales of biodiesel was ahead of the year-ago quarter but well below the last two quarters as market demand during the cold winter months declined.

We continue to work towards a product that is acceptable for cold weather use in order to reduce the seasonal reduction in sales. Turning to our polymer segment which represented 20% of our revenue for the quarter, polymer earnings contributed to the majority of the Company's improvement to gross profit.

Polyurethanes polyols earnings improved over the year-ago quarter as a result of price increases initiated during the 2005 year to recover lost margin to to rising raw material costs. Polyols volume, however was down versus a year ago quarter. Continuing the weakness experienced in the second half of 2005 continued.

Phthalic anhydride earnings improved due to higher volume. Finally, especially products which accounted to 2% of the Company's sales in the first quarter. Specialty products earnings declined due to lower food ingredient margins brought about by price competition. We expect a gradual improvement over the balance of the year due to improving volumes.

Turning to expenses, the 9% increase in marketing expense was due to the reassignment of some research head count to the marketing organizations resulting in an offsetting reduction of research and development and technical service costs of 6%. The general administrative expenses increased during the first quarter due to higher outside legal and consulting costs and higher salary costs brought on by [inaudible] headcount vacancies. Looking at other income, interest expense increased by 15% during the first quarter due to higher average interest rates.

Turning to the balance sheet, total debt as of March 31, 2006, was 136.4 million, up from 125.7 million at the end of 2005. Our total debt to total capitalization at quarter end was 44.7%, down from 46.3% at the same time last year. Capital expenditures were 9.1 million for the first quarter of 2006 compared to 8.2 million for the first quarter of 2005.

Full year capital spending for 2006 is projected to increase by 10 to 20% compared to 41.5 million total spending during 2005. Looking ahead, we expect continued improvement in surfactant earnings due to better alliances in fabric softener, [amplateric] and biodiesel sales.

We completed our biodiesel expansion at our Millsdale/Joliet, Illinois site and expect improved sales volume and contribution for the balance of 2006. The continuing rise in crude oil prices should allow for improved biodiesel margins. Polymer volume is also improving as we had forecasted. Overall we are optimistic that 2006 earnings will continue to show improvement over 2005. This concludes my prepared remarks.

I would like to turn the call over for questions. Operator, please read the instructions for the question portion of today's call.

[ OPERATOR INSTRUCTIONS ] Our first question is from George Gaspar with Robert W. Baird.

Good afternoon. Pleased to see the numbers the way they were and looking forward to better results, improved results as you go along in your year. My question, I would like to delve into this biodiesel a little bit. Can you describe where you came from to where you are now, in terms of your poundage of capacity, what kind of investment has gone in there and what do you think of this, what percentage of the market do you think you have and can you talk a little bit about what you actually do to suffice for the biodiesel? In terms of market growth opportunity?

Let me back up and give the background that you are inquiring about. As we have discussed in the past, the equipment we initially had available in our Joliet plant site was used to process coconut oil derivatives for our detergent product lines. Similar technology for processing soybean was available so we got into the biodiesel business, really using existing equipment with minimal investment. That gave us about 70 million pounds of capacity.

As the market developed and tax incentives were firmed up by Congress, we went ahead with 70 million pound expansion that brought us up to 140 million pounds or 19 million gallons. That is where we sit today. That capacity is up and running now. Certainly with crude oil where it is, the margins have expanded in the last few weeks. It looks pretty good for the time being.

The tax incentives I referred to in the past are legislated to expire in 2008 so the economics beyond 2008 are partly going to be driven by increasing demand for renewable energy sources such as biodiesel as well as the fact that we see other alternative feedstocks as being viable in addition to soybean oil. If soybean oil should rise as we expect that it will, we would look to alternative feedstocks such as palm oil or tallow oils for production of biodiesel. As far as where we go from here, we are vigorously studying cost options for further expansions. We have looked at multiple locations in five plants in the United States. The core operation still looks most attractive in our Illinois site but we don't have a firm capital cost yet. We are still studying it.

I don't know if you are alluding to the impact of the sulfur reduction rules in one of your comments but that is going to be a factor. Biodiesel produced from soybean oil has no sulfur so as these reductions come into play later this year, the more the blender puts some soybean in the lower you can get as sulfur, meeting the sulfur standard.

That is a national impact due to going into effect by the end of this year? Is that correct?

The sulfur reduction, I think they are phased in so I don't have the exact dates.

Ultimately we're going from 500 parts per million to 15?

I believe that is correct.

Which is pretty heavy.

It is a real challenge.

I can't imagine. It looks like there is significant opportunity on this biodiesel considering the sulfur situation. If I could just follow up. The fabric softener side, now you've got a plant that is going to be a new plant in the Philippines that you are constructing and is your target still early or late third quarter to get underway on that?

The completion, the construction is nearing an end in the next few weeks. We would hope to be gearing up into commercial production with sampling product that customers, by mid year, following commercial sales by the third quarter. That is a significant improvement for operation of the Philippines product line, traditional detergent lines has gotten very weak. This will be a significant opportunity for us to improve the profitability of our Philippine operation and diversify the product line.

A large portion of that is designed -- Planned to be export sales throughout Southeast Asia. It is a market penetration opportunity into a growing market as fabric softener are still in their relative infancy outside a North America and Europe.

Will this be the first on trade in fabric softener outside the U.S. as far as international?

No, we are very large since fabric softener in Europe for quite some time. A lot of our growth has been in Latin America, primarily Mexico recently. And continued growth in Europe and expansion in the U.S. Nevertheless several years. Outside of Europe and North America including Mexico those will be our first entree.

Okay. Thank you.

Thank you.

Next question is from Beverly Matchsinger from Grayson White, please go ahead, ma'am.

I have a follow-up on the biodiesel. In the commentary, you said there was seasonality issues, not having the right product. Can you talk about what that means?

It is identical to the problem that already exists with diesel fuel. When you get below zero Fahrenheit, diesel fuel starts coagulating. You have to keep the engine running all the time or keep the fuel heated otherwise you get some potential clogging in the filtration system before combustion. Biodiesel has a similar property and depending on the level of purity you may have worse coagulation or low viscosity problems than straight diesel. We are looking at what we can do through improving the profile of our biodiesel or people use boosters or chemical additives to eliminate the problem. We are working on a solution and we hope we will have that in place before the next winter season.

I have a question on the China joint venture. Do you have a timetable for maybe that starting to add to the company or are you still investing at this stage?

It is running close to break-even right now, through the first quarter. We expect to generate profits by the end of the year so we expect to turn profitable and generate modest profitability this year, but the opportunities we are uncovering would suggest in the longer term there are plenty of opportunities for us to broaden product portfolio and downstream capacity. Even though we are still at the infancy of this joint venture, all of our business people feel very positive about the opportunities that are coming forward.

Thanks.

Next question is a follow-up question from George Caspar from Robert W. Baird.

The question on the European market in general, how are you experiencing your cost structure at this point relative to the first quarter and the environment form from a revenue generating point of view for the remainder of the year?

As you know we have been trying very hard to get costs under control as well as to get our volume fully utilized. We had significant improvement last year as the result of a shutdown by Huntsman of their UK facility which has helped tighten up capacity and improved our volume in the UK. We have seen some improvements in the continent. The raw material situation is still very fluid with crude oil getting more volatile and natural gas bouncing around. It will be a challenge but we believe Europe in total will be a more solid contribution than it was last year. Steady improvement.

I have a question on the value of your asset base in the United States. It is rather unbelievable. The hurdles that companies have to get over when it comes to building new chemical facilities and specialty would probably fall into that category. It seems like you are pretty positioned around the United States in the existing facilities that you have. What do you in vision for an opportunity to build your existing location because I would assume that is much better for you and easier on a permanent basis, maybe makes a lot of companies envious with environmental impact. Can you comment on that?

It is very true that the indirect cost of operating a chemical plant and getting it up and running and getting a permit is very difficult today. The trend in the chemical industry has been consolidations, expanding the footprint no more than they need to. We held tight with five sites in the U.S., Canada and Mexico, to solidify our position as competitors contacted with our customer relations and our supply chain ability. When you talk about the opportunity to build that platform, biodiesel is an excellent example. We get into the biodiesel business for a fraction of what we believe or understand to be the costs associated with startup biodiesel facilities that have gone up in the Midwest in the last 12 months. There are plenty of opportunities that we would like to continue to pursue. The polymer group has new product opportunities that would not be grass roots they would be bolts-ons to our existing facilities. It is an advantage that we look to capitalize on.

Thank you.

There are no further questions at this time.

I would like to thank everybody for joining us today. I look forward to talking to you in the future. Thank you.

That concludes the conference for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.