Stepan Co (SCL) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Stepan Company second quarter 2009 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, July 29, 2009.

I would now like to turn the conference over to Jim Hurlbutt, Vice President and Chief Financial Officer of Stepan Company. Please go ahead.

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.

Turning to the quarterly review, as we report record earnings for the second quarter and first half of 2009, I am pleased to say that our strategy focused on diversifying Stepan's customer and product mix within our core markets combined with companywide cost reduction efforts, driven by our purchasing group as well as our Six Sigma teams all added to the record profit during this time of falling raw material costs. Our success on these fronts, combined with the relatively recession-resistant characteristics of the consumer laundry and personal care market, provide the central drivers for our record earnings which are even more remarkable in light of the lower net sales and volume levels associated with the weakness in our other surfactant end use markets and in our polymer business.

Improved profitability and operating cash flows have allowed us to further strengthen our balance sheet through continued debt reduction and a $49.1 million increase in cash during the second quarter of 2009. With total debt decreasing by $10.5 million during the second quarter and debt net of cash was down by $59.6 million for the quarter.

Let's look at the top line of second quarter results. Total net sales for the second quarter were $321 million, down 24% year-over-year. The decline in sales was primarily related to lower sales volume, which accounted for nine percentage points of the sales decline, lower selling prices, which also accounted for nine percentage point decline, and lastly, lower foreign sales due to foreign currency translation effect, which accounted for six percentage points of the sales decline. Lower selling prices were due to falling commodity raw material costs, which in some cases have recently started to move higher. Net income for the second quarter was $19.6 million, up 101% compared to net income of $9.8 million a year ago. Second quarter earnings per diluted share was $1.83 versus $0.93 in the year ago quarter.

Net income performance benefited from declining commodity raw material prices and expense controls throughout the company. Net income included approximately $2.8 million in deferred compensation expense, or the equivalent of $0.26 per share in expense during the second quarter. A detailed table around the financial effect of the deferred compensation plan has been provided in the earnings release for your reference. Second quarter gross profit increased $15.7 million or 31% as compared to the year ago period, despite the net decline in total sales volume over the same period. Operating expenses for the second quarter increased $2.1 million, or 6% as compared to the year ago period, primarily as the result of the $2.8 million increase in deferred compensation expense. If we exclude the impact of the deferred compensation expense, quarterly operating expenses declined $900,000 or 3% year-over-year.

Turning to the business segments, first let's look at surfactants, the largest segment of our business, which accounts for 74% of total companywide sales. Second quarter net sales of surfactants totaled $238 million, a decline of 23% year-over-year. While total surfactants sales volume declined 7% versus a year ago, surfactant volume in our largest surfactant market, consumer laundry and personal care actually rose year-over-year in North America and Europe. Total surfactants volume declined primarily as a result of lower biodiesel volume and weakness in the oil field and housing markets. Surfactant gross profit increased by $12.8 million in the second quarter, up 38% year-over-year. The rise in gross profit was driven by declining raw material costs, purchasing lead cost reduction initiatives, lower freight costs and operating cost efficiencies, driven by ouR Six Sigma teams.

The strength of the US dollar during the quarter reduced surfactants gross profit by $2.8 million as a result of the translation of foreign results. Please see table three in our earnings release for a summary of the effects of foreign currency translation on net sales and net income line items.

Turning to our polymer segment, which represented roughly 22% of total sales, polymer second quarter net sales totaled $71 million, a decrease of 31% year-over-year. Segment volume declined 18% as compared to the year ago period, primarily as a result of lower sales of polyol used in rigid installation foam for flat roof, commercial construction as the recession has slowed new as well as retrofit construction. Polymer gross profit for the second quarter increased by $400,000, or 2%, due to lower raw material costs despite the decline in volume. Phthalic anhydride gross profit declined on a 7% reduction of volume, primarily due to the lower demand in the automotive, housing, boating, recreational vehicle, end use market which remained weak. Our planned polyol capacity expansion in Germany remains on hold today with construction likely to begin in 2010.

In our specialty products segment, which accounted for 4% of the company's total net sales for the quarter, specialty products sales totaled $11.6 million, an increase of 25% year-over-year. Specialty products' second quarter gross profit increased $2.3 million to $4.8 million, up 91% as compared to a year ago. The surge in gross profit was primarily attributable to a 43% increase in food ingredient volume, combined with margin recovery related to lower raw material costs.

Turning to other income and expenses, interest expense declined $1 million or 38% for the quarter due to declining average debt levels. The loss from equity investments in joint ventures declined by 52% to $286,000. Equity income from the Phillipine joint venture improved by $1 million while the equity loss for the Tiorco enhanced oil recovery joint venture added $700,000 of expense. The company has secured a new contract to supply requirements for new enhanced oil recovery flood project but still projects the EOR business will not be profitable before 2010.

Within other income, we recorded a gain of $1.2 million for the quarter associated with foreign exchange gains as well as investment income on assets held for our deferred compensation plan. Our effective tax rate for the quarter rose to 36.1% compared to 32.8% in the year ago period. The tax rate increase was primarily driven by a greater percentage of consolidated income being generated in the US where the effective tax rate is higher. Lower US tax credits also contributed to higher effective tax rate.

Looking at the balance sheet . Total debt as of June 30, 2009, was $121.5 million, down $10.5 million for the quarter and down $21.4 million year-to-date, representing a 17% year-to-date reduction in total debt. As of June 30, 2009, net debt, representing total debt less cash, was $65.7 million, down by $59.6 million for the quarter representing a reduction of 48% in net debt for the second quarter. Lower debt levels were attributable to lower working capital requirements as well as higher net income. Working capital requirements declined due to lower raw material cross brought about by the decline in crude and natural oil prices. Our total debt to total capitalization at quarter end was 32.9% compared to 40.7% at year-end 2008 and 41.8% a year ago. The ratio of net debt-to-capitalization at June 30 was 21% compared to 37.8% at the end of 2008 and 40.9% one year ago.

Capital expenditures were $7.7 million in the second quarter, down 9% from the year ago period. Looking forward we continue to expect our 2009 full year capital expenditures to be in the range of $44 million to $48 million. Turning to our cash flows during the quarter, the company generated $70.7 million from operating activities, up from $4.1 million a year ago. As a result, Stepan's total cash position increased to $55.8 million as of June 30, 2009. The significant cash flow improvement was driven by higher income and lower working capital requirements, reflecting the positive impact of the lower raw material pricing. During the quarter, Stepan paid out $2.3 million in cash dividends to its common and preferred shareholders, bringing the year-to-date total to $4.6 million. During the first quarter, the company purchased 34,000 common shares in the open market at a cost of 998,000 or $0.2925 cents per share. As of June 30, 2009, 452,000 shares remained available under the company's current share repurchase authorization.

Before I open the call to questions, please let me provide some updated perspective on Stepan's expectations for the full year. While polymer and functional surfactant volumes have been and are expected to be negatively impacted by the economy, overall, we expect our business should continue to fare better than most in this recessionary environment. A key component of this is the relatively recession-resistant characteristics of our laundry and personal care surfactants business. Volumes for these products were up slightly in the first six months, and we expect them to continue to perform well despite the recession. Based on the solid financial performance in the first half of 2009, we are now expecting to deliver record profits from operations in 2009.

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

Thank you very much, sir. (Operator Instructions). I'm showing no questions from the phone lines at this time, sir.

Well, if we continue to deliver record profits, maybe this will keep the calls to a minimum like this, so I would appreciate or thank everybody for participating in today's call and look forward to hearing from you next quarter. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation and we ask that you please disconnect your lines. Thank you very much and have a good day.