Stepan Co (SCL) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2007 earnings conference call. During this presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a Question and Answer Session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded August 1, 2007. I would now like it turn the conference over to Mr. 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, 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 second quarter 2007 operating results. Net sales for the second quarter were $336.2 million, an increase of 15% from $292 million for the same period in 2006. Sales volume improved by 9% during the quarter. Higher selling prices contributed a 4% increase, and translation of foreign sales added 2% to the increase in sales. Net income for the quarter was $4.7 million or $0.47 per diluted share compared with net income of $3.1 million or $0.31 per diluted share in the year ago quarter.

Several significant items impacted results this quarter. First, the sale of our specialty ester Personal Care surfactant product line at the end of April. We recorded a pre-tax gain of $4.3 million on the sale, net of costs, writedowns and severance charges. Second, we recorded a noncash goodwill impairment charge of $3.5 million after completing our annual test for impairment of goodwill. Following lower than expected discounted cash flow forecasts for our UK subsidiary, the Company has written off the entire goodwill in that business. Third, the deferred compensation expense was $2 million this quarter compared with $900,000 in the year ago period as a result of our share price and mutual fund appreciation. Our pre-tax income rose 69% to $7.5 million. Excluding the significant items, pre-tax income would be up 62% to $8.6 million. Gross profit grew by $5 million or 15% to $38.3 million. Operating income was $10.5 million in the second quarter, an increase of 51% from the same period in 2006.

Turning to operating expenses, second quarter operating expenses were $28.6 million, up 9% from the same period last year. The growth in expenses was largely due to the recognition of $2 million in deferred compensation plan expense during the quarter that I described a little earlier. The charge this quarter compared to an expense of $900,000 in the comparable year ago quarter. As you will recall, the accounting requirement for the Company's fully funded deferred compensation plan results in expense being recorded on the price of Stepan Company stock or mutual funds held in the plan rise and the income being recognized when they decline. Excluding the deferred compensation expense, second quarter operating expenses were up by 5% year-over-year. Our marketing and research costs were higher during the quarter on the back of increased salary and benefit costs. Research also reflects higher staffing levels versus the year ago period. However, general and administrative expense was flat at $9.5 million, as lower consulting and legal expenses offset the impact of higher salaries.

Now I would like to review the performance of our three segments. First we'll look at surfactants, which accounted for 72% of the company's net sales for the second quarter. Net sales of surfactants were up 11%, driven by an 8% increase in volumes. Surfactant gross profit improved by 13% to $23.4 million in the quarter. North America continues to drive the improvement in gross profit performance across all product lines. The exception to this trend is biodiesel. The high price of soybean oil, the main raw material used in biodiesel production, is continuing to negatively impact margins. In Europe, surfactant volume and gross profit were 11% and 10% higher respectively. With higher sales demand in France, we have expanded the capacity by increasing the factory operation from five to seven days. However, the $3.5 million goodwill impairment charge in the UK resulted in an operating loss for the region as a whole. Gross profit in Latin America was down. This was primarily driven by lower margins on fabric softener in Mexico, where raw material and outsourcing costs rose as demand exceeded capacity. We commissioned a new reactor in Mexico during the quarter, which should reduce capacity constraints and outsourcing costs.

Our polymer segment represented 25% of revenue in the second quarter. Strong global polyol volume was the primary driver of the 18% increase in polymer gross profits to $12.6 million. Polyol volume grew 51% in Europe, and combined with margin strength in that region offset a decline in North American polyol profitability, which was down on lower margins. Polyol volume in our joint venture in China rose 29%, although it recorded a small loss on higher raw material costs.

Finally, our specialty products segment accounted for 3% of the Company's sales in the quarter. Gross profit was largely unchanged as the weaker pharmaceutical profits were offset by improved food ingredient profitability. Total sales dollars grew by 7% for the quarter.

Looking at other income and expenses, interest expense increased by 15% in the quarter. This was due to higher average debt levels as a result of increased working capital requirements and capital expenditures. Improved sales volumes and increases in raw material costs pushed the requirement for working capital during the quarter. The loss from our Philippine joint venture increased slightly. While the profitability of the new Philippine fabric softener plant continues to improve, this is being offset by losses on the commodity laundry products portion of the product portfolio.

Turning to the balance sheet, total debt as of June 30, 2007, was $138.5 million, up from $131.2 million at the end of 2006. Our total debt to total capitalization at the quarter end was 41.5% compared to 43% in the second quarter of 2006. Year-to-date capital expenditures were $21.7 million, up 4% over 2006. Full year capital spending is projected to be in the range of $38 million to $42 million for the full year.

Looking ahead, this was a good quarter overall for Stepan, and we believe that favorable conditions for North American surfactants and global polyol will allow us continue generating profitability improvements in the second half. In addition, the steps we've taken, including the sale of our Personal Care ester product line, last year's restructuring in Europe, and the recent capacity expansion in Mexico will improve profitability as we move forward. With ongoing cost pressures impacting biodiesel profitability, we are not currently moving forward with any plans to expand capacity in that segment. We have notified the state of Illinois that a previous offer of grant money for biodiesel expansion will not be accepted. However, we are continuing to take steps that we believe will deliver further profit growth going forward. We have recently renegotiated a new labor agreement for our largest manufacturing site in Illinois, freezing the current defined benefit plan and replacing it with a defined contribution plan. We have also introduced several new technologies, including a next generation polyol, giving us confidence we're on track for the remainder of 2007 and increasingly well positioned for earnings growth in 2008. This concludes my prepared remarks. At this time, I would like to turn the call over for questions. Operator, please review the instructions for the question portion of today's call.

I would be glad to. (OPERATOR INSTRUCTIONS) One moment please for the first question. (OPERATOR INSTRUCTIONS)

Mr. Hurlbutt, there are no questions at this time. I will now turn the call back to you for your presentation or closing remarks.

Thank you to everyone who listened in on today's call and I look forward to next quarter's call. Thank you again for participation.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.