Stepan Co (SCL) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter 2007 earnings conference call. During the 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 Wednesday, February 13th, 2008.

I would now like to turn the conference over to Mr. Jim Hurlbutt, Vice President and Chief Financial Officer. 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 Security and Exchange Commission filings.

I am pleased to report that Stepan made significant progress against the Company's financial and operational objectives in 2007. Most importantly, we continue to focus on driving higher levels of profitability, as well as returning value to our shareholders. Our success in both of these areas was clear. On the profitability front, Stepan increased full year 2007 net income by 127% year-over-year to $15.1 million, supported by double-digit sales growth across all business groups.

At this point, let me turn now to walking through our fourth quarter and full year 2007 operating results. We will start with a look at the top line. Total net sales for the fourth quarter were $342 million, an increase of 19% from the $288 million in sales reported for the same period in 2006.

Net sales benefited from higher selling prices, accounting for 14% net sales growth. Also the positive effect of foreign exchange translation, which accounted for 4% of net sales growth, and finally improved volume, which accounted for 1% of the increase in sales. Total net sales for the full year rose 13% to $1.33 billion, supported by higher volume, accounting for 5% of the sales growth, higher selling prices, accounting for 5% of the sales growth, and finally the positive effect of foreign exchange translation, which accounted for 3% of the net sales growth.

Net income for the fourth quarter was $1.6 million, or $0.15 per diluted share, compared with a net loss of $5.5 million, or $0.63 per diluted share, in the year-ago quarter. Fourth quarter gross profit increased by $9.1 million, up 38% year-over-year, supported by improvements in all three business areas. Gross margin jumped roughly 140 basis points to 9.8% of revenue, from gross margin of 8.4% in the year-ago period.

Full-year gross profit rose 12% year-over-year, with gross profit margins of 10.6%, in-line with the 10.7% 2006 full-year margin. Operating income was $5.8 million in the fourth quarter, as compared to an operating loss of $8.6 million in the fourth quarter of 2006. Full year 2007 operating income rose 121% year-over-year to $35.1 million. As I mentioned earlier, full year net income increased 127% to $15.1 million, or $1.50 per diluted share, up from $6.7 million, or $0.63 per diluted share, in the year-ago period.

Turning to operating expenses, fourth quarter operating expenses totaled $27.5 million, down 16% as compared to the same period last year. The decline in operating expenses was primarily due to the absence of $6.2 million in legal settlement expense and severance costs incurred in the prior year period. Additionally, deferred compensation expense declined by $1 million year-over-year.

As you will recall, the accounting requirement for the Company's deferred compensation plan, results in an expense being recorded when the price of the Stepan Company stock or mutual funds held in the plan rise, and the income being recognized when they decline. Excluding exceptional legal, severance and deferred compensation impacts from both periods, fourth quarter operating expenses increased 8% due to higher wage expense, benefit costs, and the effect of foreign currency translation.

Fourth quarter marketing expenses increased 8% year-over-year to $9.2 million. Administrative costs declined 39% to $10.4 million, primarily related to the absence of a $6.2 million in legal settlement and severance costs from the prior period. Research costs rose 9% year-over-year to $7.9 million. Full year operating expenses declined by 3%, or $2.9 million. Excluding a $1.4 million decline in deferred compensation expense, and the aforementioned $6.2 million in legal settlement and severance costs, operating expenses grew by $4.7 million, or 5%, driven by higher wage and benefit costs, as well as the effect of foreign currency translation.

While we are on the topic of foreign currency effects, Stepan's foreign exchange impact for the year, the decline of the U.S. dollar, particularly against the Canadian dollar, resulted in foreign exchange losses and foreign translation gains, producing a net expense of $1.8 million, versus $300,000 of income a year ago. The majority of the loss is related to the U.S. dollar denominated receivables held by the Company's Canadian subsidiary.

Let's now move to a review of the performance of our three business segments. First we will look at Surfactants, which accounted for 74% of the Company's net sales for the fourth quarter and full-year period. Net sales of surfactants were up 18% quarter-over-quarter, and 11% year-over-year. Fourth quarter volume decreased by 1%, while full-year volume grew 4% as compared to the respective prior year periods. Surfactant gross profit grew by $7.2 million, or 43%, to $23.9 million in the quarter, driven by improved product and customer mix, which contributed to higher margins. Surfactant selling prices were increased to recover higher petroleum and natural oil costs.

Fourth quarter volume declined by 1% on lower biodiesel volume, while geographically North America, Latin America, and Europe all posted improvement. Full year Surfactant gross profit grew 13%, or $10.4 million, driven by a 4% increase in volume. Strength during the year came from the recovery of escalating raw material costs and selling prices, as well as improved product mix, including increased contributions from higher margin Specialty blends and Agricultural products.

It is important to note that due to the higher farm crop prices, we have seen stimulated Agricultural product demand, which is expected to remain strong through 2008. Volume gains were largely in North America on laundry and cleaning products, Ag product and specialty blends.

European surfactant sales volume grew at a 5% rate, primarily due to increased sales of fabric softener. This broad-based improvement more than offset lower biodiesel profitability, and profit margins in Latin America which saw volume decline slightly. European Surfactant sales volume grew at a 5% rate, primarily due to increased sales of fabric softener.

Our Polymer segment represented 24% of revenue in the fourth quarter, and 24% of revenue for all of 2007. Net sales of Polymers were up 20% quarter-over-quarter, and 22% year-over-year. Polymer volume grew 13% in the quarter, and 9% for the year, based on higher polyol sales volume in both North America and Europe.

Fourth quarter Polymer gross profit grew by $1.7 million, or 22%, rising energy costs and positive changes in the regulatory standards for the environment, are driving higher demand for roofing insulation. Stepan's polyol products are primarily used for the replacement roof market versus new construction. Phthalic anhydride gross profit improved quarter-over-quarter, on higher sales volume as PA production returned to normal operating rates.

For the full year period, Polymer gross profit grew by $2.7 million, or 7%. Polyol volume grew in Europe and North America. Market conditions in Europe improved significantly, on higher demand for polyol and commercial roof insulation. Phthalic anhydride volume declined in large part, due to production outages during the third quarter, resulting in outsourcing costs and lower sales volume. The PA plant is back on-line and it's operating schedule has returned to normal.

The triennial maintenance turnaround is planned for 2008, which will further improve reliability in 2009 and beyond. Supporting our outlook for growth in the Chinese market, a research and pilot facility has been constructed in China, to support development of that market. To-date, sales volume in China grew by 1%, as we continue to pursue initiatives focused on further penetrating this important market.

Finally, our Specialty Product segment accounted for around 2% of the Company's sales in the fourth quarter and full year. Net sales of Specialty Products were up 22% quarter-over-quarter, and 17% year-over-year. Specialty Product fourth quarter gross profit grew by $300,000, or 33% year-over-year. For the full year 2007, gross profit grew by $2.2 million, or 32% year-over-year. Quarterly and full year results for the group were largely driven by higher sales volumes, in both pharmaceutical and food ingredient markets.

Looking at Other income and expenses, interest expense for the year rose 10%, due to higher average debt levels and short-term interest rates. The fourth quarter loss from our 50% equity in the Philippine joint venture declined, falling to just $200,000, from $400,000 in the year-ago period. Rising fabric softener sales volume was the primary driver, while the larger volume of commodity laundry products continued to post losses.

The other net portion of our income statement is largely attributable to the previous explained foreign exchange losses, caused by the sharp decline in the value of the U.S. dollar.

Turning to the balance sheet, total debt as of December 31st was $128 million, down from $131.2 million at the end of 2006. Our total debt to total capitalization at year end was 38.3%, compared to 42% in the fourth quarter of 2006.

Capital expenditures were $10.5 million the fourth quarter, down 33% from the same quarter last year. On a full year basis, capital expenditures totaled $39.8 million, below our 2007 projection of $42.5 million, and below the full year 2006 CapEx of $46 million. 2008 capital expenditures should approximate $40 million.

Looking ahead, overall we concluded 2007 with improved operating results across all three core businesses. These improvements reflect the benefit of our investments and capacity additions, as well as the success of our corporate restructuring activities implemented over the course of the past 15 months. While we cannot dismiss the potential influence of the general economic factors that might influence the broader economy in 2008, we currently see opportunities to capitalize on existing plant capacity, and drive additional profit 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.

Thank you. Ladies and gentlemen, (OPERATOR INSTRUCTIONS)

One moment please, for the first question. And our first question comes from the line of George Gaspar of Robert W. Baird. Please proceed with your question.

Yes, thank you. And congratulations there on your increase in title. I know that you are doing a great job.

I appreciate it.

You deserve that. Can you relate a little bit more on where you are on some of the capacity levels within the Company, considering now the CapEx that was spent in '07? For example, where are you like in South America, in the U.S., if you take an overview of the U.S., and then in the Far East, the Philippines, China, what you are doing? Can you give us any incremental percentages there?

Sure. Let's do it in two pieces, because the two segments really are quite different, in terms of capacity utilization. If we look at Surfactant, most of our capacity in Europe is pretty well utilized. In the Philippines, it is pretty full up, in terms of sulfonation. We have excess fabric softener capacity in the Philippines. In Europe, we don't have much fabric softener capacity, so that is fairly utilized.

The major capacity available for the Surfactant group today is in the traditional sulfonation side, or detergent-type products, and most of that capacity would be right here in the U.S., particularly in Illinois. It is centrally located, easy to tap for supporting opportunities throughout all of North America. In Brazil we have got the capacity left on the sulfonation unit. We have added a multipurpose reactor. That still has capacity available for diversifying the product line.

But in the big picture, in terms of available capacity, the biggest available opportunity is filling out in North America, or particularly here in the U.S. on the traditional core products. Quite honestly, we could be close to, based on our projections within the next 12 to 18 months, we might be getting closer to a higher level of utilization even here in North America.

In terms of the Polyol group, we have a pretty well sold-out situation in Europe, where we are actually bringing product over from our Illinois plant, to supplement the European demand right now. At some point we will have to make a decision whether to expand Europe. We have done some debottlenecking. We would expect to expand that plant at some time. We are just not sure yet whether it is a 12-month off, or 18-month off decision. But eventually we will need to expand that plant, because it is not overly economical shipping from the U.S.

Then our Chinese plant still is probably only running at less than 50%. So there is an enormous opportunity to tap that capacity for Polyol in China.

Okay. And in terms of trying to match up on the CapEx that you are talking about for '08 at $40 million, where is the emphasis going to be on that expenditure? Can you relate that?

Well, we are, as I said, tapped out on softeners, so the first and foremost on our list is to get another fabric softener reactor here in the U.S., in the ground, and then we have referred to the fact that we have got a triennial turnaround of our PA plant in the Polymer group. In addition to a turnaround, we are going to make some improvements to that facility. Some of it is not capacity related. Some of it is safety and environmental, and some of it is reliability.

So there will be a fair amount of money going into the Polyol group to support the PA plant, which as you know, the PA product, phthalic anhydride, is a significant portion of our polyol molecule, it is very vertically integrated to our business. We want to make sure that plant is operating very reliably. And that commodity has tightened up a little bit recently, and so there is hopefully going to be some opportunities to improve margins in the underlying phthalic anhydride market as well.

Okay. And then just generally, on Europe now, we are getting close to the middle of the first quarter, are you sensing that you can improve upon the first quarter of last year, in terms of your performance?

You know, everyone is afraid of the R word, and we quite honestly, have not seen signs of softening in our business. In fact, we are seeing just the opposite. Things are looking pretty promising. We are pleased to see that Colgate and Proctor are seeing the same thing. So we are optimistic.

Obviously everyone is very concerned should a significant downturn occur in the whole economic conditions in the United States, particularly, but Europe, we are seeing broad-based strength in Europe and North America. So we are just pinching ourselves, and hoping that we don't see any slowdown, because right now our business is performing very well.

Okay. All right. Thank you. I will requeue.

Our next question comes from the line of Beverly Machtinger of Grace and White. Please proceed with your question.

Hi, Jim.

Hi, Beverly.

Congratulations, by the way.

Thank you.

I just wanted to touch a little bit more on the capacity, and are there any plans for closing facilities that are not performing well?

As you know, we have talked in the past, and really studied each site independently, to try and determine how best to optimize that site, which precipitated the sale of one of the product lines at our Maywood, New Jersey site, so we could do some consolidation and reduction in workforce at that site.

And at this point in time, we have not concluded there would be a benefit to any actual sites being taken out of service. So at this point the answer is no, but we do continue to study that for the most optimum configuration.

Okay. And then the other thing, do you see any opportunities for some, I guess either acquisitions or just product line acquisitions, like what is happening in the market now?

Yes, we are continuously, in fact, we have got a team that spends quite a bit of time on that looking for opportunities, both to buy and/or sell, to optimize our product portfolio. So, no, we feel very good that with our own operating results, improving that we are in a better position to gain more traction looking for product line additions, ideally bolt-ons that don't require additional production facilities, that we could drop into our plants and synergize.

Are there things out there?

Yes. Certainly quite a bit. As you know, in our Polymer group, we are really fairly narrowly focused to polyols, for at least most of our volume is in polyols for rigid insulation foam, and then our PA, phthalic anhydride is part of that molecule, and then we sell the balance into the merchant market, but beyond that, we have not penetrated significantly in other applications, in the coatings, adhesives, sealants, we are flexible for markets, we very much would like to continue to expand in those fields, where we feel we have got a lot of technology, and potentially could hopefully acquire some technology as well.

Okay. And then finally, can you just give us a little bit of an update on the biodiesel situation, and what the Company's plans are for that, now that we have had that nice little spike from it, but what does the future look like for biodiesel?

Quite a bit of uncertainty. Legislation expending the excise tax credits was extended, and there is a targeted use percentage in the United States in that legislation. That being said, the margins for the products has not recovered. The rise, the rapid rise in soybean oil prices, as well as tallow and the other oils that you can make biodiesel from, ran up to the point where the margins really are very nominal.

At this point what we are doing is we have pursued converting one of the reactors successfully in December, to be able to use it both for biodiesel and for a fabric softener intermediate that we currently outsource. So we are getting greater value utilizing that reactor for our fabric softener intermediate, and we are really looking now for some longer term partners, who are interested in contracting for the long haul on biodiesel volumes, so that we can not be quite as dependent on the spot market, and the fluctuations in margins that result.

There are incentives by some municipalities and some companies to use more biodiesel to improve their green movement internally. So as we talk to those people who are trying to look for longer term relationships, where we could share some of the risks on the volatility in the margin. So we do not expect to expand that plant in the near future, under the current economic environment for biodiesel.

Okay, great, thank you, Jim.

Thank you.

We have a follow-up question from the line of George Gaspar from Robert W. Baird. Please proceed with your question.

Thank you. Jim, is there any update that you can transport here on the polymer testing? I believe that you have been involved in a couple of secondary oil field projects?

Well, ours is really a Surfactant for use in the enhanced oil recovery projects. I guess there is a co-polymer that can be used with our surfactants. It is still very early. The technology was developed over 30 years ago. We participated in projects. We are still trying to get into some floods in North America, and we have reached out to other groups that have technology in this area, to see if we can accelerate the penetration of this market, but unfortunately it has been quite slow. It is a very decentralized market now, because a lot of the older oil wells are no longer owned by the major multinationals.

When these properties become small, they sell them off, so there is literally thousands of independent producers out there, who suddenly are making a lot of money at the high price of crude, and may not be particularly interested in rushing to spend more money to improve their yield in their fields, but we still think there is a significant opportunity there, because the technology works, but the market penetration is going to be the tougher nut here. We are still on it, but we don't have any near-term results to report.

Okay. And a profile, considering where oil and gas prices are now in this quarter, on average, versus where you were in the first quarter this past year, have you pretty well adjusted out your cost, in terms of getting over that cost, in terms of pricing of product, so that you can still get the same or better margins, as you are seeing first quarter here?

Yes. I think we feel like over the last certainly four or five quarters, we have had to just keep pounding away to recover the raw material costs, but I think we feel pretty comfortable now that we, in most product lines, have been able to recover the overall effect, and then hopefully and then some, to build some recovery into our margins.

And we had another price increase January 1 across the board in many of our product lines. If things were to stabilize I think we are at a point now where we feel that, and we continue to see some tightening in the demands for phthalic anhydride commodity surfactants in North America. We could probably see some further improvements.

And the product or the marketing availability, or how you see the market on materials that you are producing, for the basic chemical materials for the construction market, how do you see that? Still tapering at this point?

That is our one soft spot. Fortunately, that is not a large segment for us, but we sell into the gypsum board market and some paint additives, and that is soft. Fortunately, it is a small enough part of our business that it didn't have a significant impact on '07 results.

So we have some products though, that despite the downturn in that segment, have some proprietary advantages for the paint market, that we would hope to gain market share despite a down market. So we are hoping that we can still grow that business despite the housing downturn.

Okay. And do you have any stock repurchase agreements in place currently that are still open, or have you pretty well fulfilled whatever you have been approved on in the past?

Well, we have a small authorization left, but it is usually just, we don't have an active plan to acquire shares, other than for needs for our benefit plans, or to operate our stock option plan, but we are not actively in the market today repurchasing shares.

I see. Okay. All right, thank you.

Okay, thanks, George.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS) Mr. Hurlbutt, there are no further questions at this time.

Okay. I will take this opportunity to thank you all for participating in today's call. Thank you.

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