Stepan Co (SCL) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter and full year 2010 earnings conference call. During the presentation, all participants will be in a listen-only mode. And afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, February 9, 2011. And I would now like to turn the conference over to Jim Hurlbutt, Vice President and Chief Financial Officer. Please go ahead, sir.

Good afternoon and thank you for joining the Stepan Company fourth quarter and full year 2010 financial review. 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 am pleased to start today's discussion of Stepan's 2010 performance by reporting our third consecutive year of record net income, as well as double-digit top-line sales growth for the fourth quarter and full year 2010 periods.

Our success in terms of driving record levels of profitability, while navigating a range of challenging economic conditions, is due to the strength of our core specialty and intermediate chemicals business, the experience and expertise of our global team, as well as our ability to drive operational efficiencies across the organization. Stepan's 2010 performance was further highlighted by our significant investments focused on growing our global business in the areas of emerging markets, energy and innovation. Operationally we completed the expansion of our facility in Brazil and are beginning to ship commercial quantities, which will allow us to leverage our full product offering franchise into the higher growth Brazilian market. We also anticipate the planned expansion of our polyol plant in Germany to go online during the current quarter, helping us meet projected European demand in 2011 and beyond.

We expect higher levels of costs related to the European REACH initiative to continue in the near-term, as we support this multi-year regulatory effort. Our investments in organic growth initiatives such as these were also complemented by a number of acquisitions in Europe and Asia aimed at expanding our global manufacturing platform to effectively meet the growing and evolving demands of our international customers. Throughout 2010 and into 2011, the Company has continued to monitor and take appropriate steps to adjust pricing in order to mitigate the impact of rising raw material prices. Subsequent to year end, the Company has implemented a number of price increases aimed at improving margin performance and recovering higher raw material prices. Overall, in 2010, the ongoing strength of our business, the confidence we have in our long-term strategy and our solid balance sheet provide us a strong foundation for our Board of Directors to approve our previously announced increase in the Company's annual common stock dividend.

Our 2010 dividend increase marked the 43rd annual dividend increase, an impressive milestone highlighting our focus and dedication to returning value to our shareholders. Let me now walk through our fourth quarter and full year results. Starting with the top-line, total net sales for the fourth quarter were $361 million, up 16% year-over-year. For the full year, 2010 net sales rose 12% to $1.43 billion. The rise in fourth quarter sales was primarily related to higher selling prices, which accounted for 13 percentage points of the growth, higher sales volume growth which accounted for 4 percentage points, while a 1 percentage point decline related to foreign exchange translation provided a partial offset. Overall, volume rose 4% in the fourth quarter with volume rising 5% for the full year 2010.

Net income attributable to Stepan Company on a GAAP basis for the fourth quarter totaled $8.5 million or $0.76 per diluted share, down 3% compared to GAAP net income of $8.8 million or $0.80 per diluted share in the year-ago quarter. Full year GAAP net income rose 4% to a record high $65.4 million, marking our third consecutive year of record earnings. Our record 2010 net income was achieved despite some headwinds we faced during the year, including downward pressure on margins related to higher raw material costs and the competitive environment, particularly in Europe. Higher research costs focused on new product innovation and regulatory compliance also contributed. The year was also negatively impacted by increased transaction costs associated with the three acquisitions executed during the year, as well as increased expense associated with a labor dispute.

The impact of deferred compensation reduced diluted earnings per share for the quarter by $0.26 and $0.20 for the full year period. Non-GAAP net income, which excludes $4.6 million in pretax deferred compensation expense, increased 19% year-over-year to $11.4 million or $1.02 per diluted share during the fourth quarter. Non-GAAP net income for the full year increased 2% to $67.6 million or $6.10 per diluted share. A detailed table around the financial effect of the deferred compensation plan has been provided in the earnings release for your reference. Fourth quarter 2010 gross profit rose 1% year-over-year to $50.5 million. Full year gross profit increased 1% to $236 million versus the year-ago period. Excluding deferred compensation plan expense, operating expenses declined 7% for the quarter and rose 2% for the full year. Operating expenses were favorably impacted by lower incentive based compensation expense and lower consulting fees.

Research expenditures declined 12% for the quarter, due to lower product registration costs, while increasing for the full year due to a $1.4 million increase in annual product registration costs under the European REACH program. Let's turn to a review of the performance of the three key business segments. First, we'll look at Surfactants, the largest segment of our business accounting for 74% of Company-wide sales for the quarter. Net sales of surfactants totaled $267 million for the quarter, a rise of 14%, with full year net sales rising 9% to $1.1 billion. Sales volume grew 2% for the quarter and 4% for the year, both of which include first time consolidation of Stepan Philippine volumes. North America volume declined 9% for the quarter and was flat for the year. Consumer product Company demand was down due to lower year-end retail sales and inventory reductions at several customers.

Surfactant gross profit declined $4.6 million or 12% for the quarter and $5.2 million or 3% for the year. The decrease in fourth quarter gross profit was due to the reduced North American volume, coupled with lower margins. Higher raw material costs and competition led to lower margins during the quarter. The full year gross profit decline reflects lower margins in Europe and higher manufacturing costs in North America, in part due to a labor dispute that was resolved in August of this year. Moving on to our Polymers segment. Representing 23% of sales, polymer net sales totaled $84.6 million for the quarter, an increase of 29% year-over-year. For the full year, polymer net sales increased 27% to $330 million. Volume increased 12% for the quarter and 14% for the year versus the year-ago period. Polymer gross profit increased $4.3 million or 43% for the quarter and rose $3.7 million or 7% for the year.

Phthalic anhydride, or PA, gross profit improvement contributed to the polymer increase due to higher volume and margins. PA is used internally in the Company's polyol and sold externally as a plasticizer in automotive, boating and housing. PA volume is beginning to recover from the recession. Polyol gross profit rose slightly in the fourth quarter versus a year ago, but was down for the full year due to lower margins. Polyol sales volume rose 25% for the quarter and 20% for the full year. Stepan's polyols are primarily used in new and replacement commercial flat roof installation, which has seen recovery from the 2009 recession. Finally, we look at our Specialty Product segment, which accounted for approximately 3% of sales. For the fourth quarter specialty product net sales totaled $9.2 million, down 15% as compared to the year-ago. Segment sales for the year declined 1% to $42.7 million.Specialty segment gross profit declined 17% for the quarter, but increased $1.7 million or 11% for the full year.

The fourth quarter decrease was the result of lower volumes, whereas the full year improvement was due to improved sales mix of higher margin products for healthcare applications. Looking now to interest expense, which rose 18% in the fourth quarter versus the year-ago period, largely due to higher interest costs associated with the Company's borrowing of $40 million of private placement debt carrying a 5.88% interest rate during the second quarter. Full year interest expense rose just 1% year-over-year to $6.3 million. For the quarter the net loss related to our joint ventures was $500,000, primarily due to our TIORCO Enhanced Oil Recovery joint venture. The gross profit on sales of surfactants to Enhanced Oil Recovery customers is included in the surfactant gross profit. This gross profit exceeded our joint venture project costs for the full year.

As oil prices continue to climb higher, we are optimistic that this area will gain momentum as producers look to cost effective ways to enhance the yield of their existing crude oil production fields. Please see table three in our earnings release for a summary of the effects of foreign currency translation on net sales and key income line items for the fourth quarter and full year 2010 periods. Our effective tax rate for the quarter was 29.4% compared to 31.4% for the year-ago period. The lower fourth quarter tax rate was due to a US tax legislation, which retroactively reinstated the research and development tax credit. Our tax rate for the year was 35.4% versus 35% a year ago. Moving now to the balance sheet. Total debt as of December 31 was $191.6 million, up $14.1 million in the sequential quarterly comparison and up $87.5 million versus the year-end 2009. The increase in debt was attributable to financing recent plant expansions in Brazil and Germany, as well as acquisitions in Singapore and Poland, with long-term debt at current attractive long-term interest rates.

As of December 31, net debt representing total debt minus cash was $80.4 million, up $5.5 million from year-end 2009. The year-over-year increase in net debt was due to higher working capital requirements related to higher selling prices attributable to higher raw material costs and improved sales volumes. The ratio of net debt to capitalization at December 31, 2010, was 18.5% compared to 1.9% a year ago. Capital expenditures were $18.9 million for the quarter, up 62% from the year-ago quarter, while full year 2010 CapEx totaled $73.7 million. Looking forward, we expect our 2011 full year capital expenditures to be in the range of $95 million to $100 million. In 2011, capital spending will include the continued work to ready our Singapore plant for production in 2012, as well as the purchase of a large warehouse at our Illinois plant location.

Looking now to our cash flows. During the fourth quarter we generated $19.9 million in cash flow from operating activities, down 57% from the same quarter in 2009. Cash flow for the quarter was driven by earnings and decreased working capital. On a full year basis Stepan generated $66.1 million in cash flow from operating activities. During the fourth quarter, Stepan had no open market share repurchases. Stepan has approximately 268,000 shares remaining and available under its Treasury share repurchase authorization as of December 31, 2010. In the fourth quarter of 2010, Stepan paid out a total of $2.8 million in cash dividends to its common and preferred shareholders. On a full year basis, in 2010 we paid out a total of $10.6 million in cash dividends to shareholders. Our equivalent yield paid out to our common shareholders in 2010 was 1.3%.

Before I open the call to questions, let me provide some perspective on Stepan's forward-looking performance. In 2010, the Company made significant investments to grow our business in emerging markets, energy and innovation. Our surfactant expansion in Brazil and our new plant in Poland should both contribute profit growth in 2011. Our new Singapore plant will undergo conversion to a methyl ester facility in 2011 and start production in April of 2012. We remain enthusiastic about the surfactant market for enhanced oil recovery. In 2011, we will continue to invest to scale this business up. The continuing recovery of the insulation market should provide growth to our polyol business, utilizing the new German capacity available in April of 2011. The Company has a healthy balance sheet and we continue to pursue both organic growth and acquisition opportunities. 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.

(Operator Instructions). Daniel Rizzo from Sidoti, Incorporated.

Polyol sales were fairly strong in the quarter, but now we're coming on some tougher comps. Obviously, growth is going to slow down, but are you still see it increasing.

The polyol volume still looks healthy and we've got price increases going out.So, in the Polyol segment the critical thing is to continue to get some of the higher raw material costs recovered and get the margins back up. Yes, we have price increases out there. The volume looks relatively healthy, so the challenge will definitely be margins. Surfactants also has got price increases out. Typically, they're quarterly. We've got some mid-quarterly increases going on this year, because of the recent run-up in some of our raw material costs.

Has it typically been easier to recover costs and raise prices in surfactants versus the polyol and polymers segment.

I would say certainly in the last 18 months surfactants has been a little bit, at least in North America, it's been easier to recover the prices. In Europe it's been a little more of a challenge. But in the polyol segment, it's been a little more challenging across the whole platform.

Okay. And with your debt being where it is, I mean, I'm sure you're comfortable with it. Are you going to be focused on paying that down, using your cash to pay that down or you're still looking more towards using your money for growth.

Our first desire is always organic growth, so we are looking -- we continue to look for opportunities. We've got a large capital expenditure budget this year, as we build out Singapore and finish some other projects. And then we do have a desire to look at other growth opportunities organically or filling in some of our own intermediate needs with capacity, internal capacity, and then lastly, we will entertain -- we have an active program to scour for synergistic acquisition opportunities. Our first goal would be to grow the Company and paying debt down would be a lower priority.

Okay. All right, thank you.

Thanks, Dan.

Justin Speer from Invesco.

Just wanted to ask a couple questions concerning the raw input inflation and your ability to pass that through as you see it right now. I guess, what is it that you would think you would need to get through potentially in light of the raw inflation? We're not just seeing it in year-end channels, but really across a lot of different sectors, but I guess in that context maybe talk to some of the capacity utilization within your business and maybe within the industry across your segments and geographies.

Yes, I think that goes back to the answer in terms of surfactants. Surfactant capacity in North America we feel comfortable is getting fairly -- getting closer to a higher level of utilization and that's certainly supported our ability to get price increases through in North America, whereas Europe still remains in a position where there's excess capacity, certainly for the commodity surfactants. So that's what's made it more problematic to drive pricing through automatically in Europe.

In the polymers space, we're adding significant capacity. So we are the guys that are bringing on the capacity, but we've always felt and continue to believe we have some performance advantages in our product that allow us to capture at least some premium in the marketplace. So we hope that trend continues, as we continue to protect our patents in that polyol space, but it's a challenge. It's certainly going to be a challenge to continue to get the prices through on the polyol, but we've seen some upward movement in margins recently. We've got more price increases going out. Now, fortunately, just recently crude seems to be backing down a little bit, so that would be wonderful.

I know that electricity plays a role as well. How's that component of the cost input inflation been?

Well, we've got most of our electricity needs under contract in a high percentage of our plants, so we're pretty well locked in for 2011 and don't see much vulnerability. And then we also use natural gas to run our boilers and that's actually been a benefit. So, we were down last year in natural gas costs in multi-million of dollars, we will probably be down again this year versus last year multi-million dollar savings on natural gas. So that piece of the equation is helping us.

Okay. And back to the, I guess, the question on the capacity expansion and thinking about the new German capacity, I guess you said early this year and then looking forward to the Singapore transition. How do we think about that in the model as those factors start layering into the equation? How do we think about that as we kind of think about your model?

Well, between the Wesseling, Germany, expansion and the Poland acquisition, we've almost tripled our polyol capacity in Europe. We certainly won't have that sold out this year, but we're certainly looking in the range of $3 million to $6 million of combined gross profit contribution, certainly by full year 2012 at the higher end of that range.

Can you repeat that. Did you say $3 million to $6 million?

Yes.

Okay.

And then the Singapore operation is really making a intermediate methyl ester that we currently already produce in Illinois and then we'll use those assets in Illinois to produce other things. So, near-term it's not going to be accretive to earnings. In fact, in 2011 it will add costs. It will not contribute. In 2011, we will start -- or '12, we will start to pick up some synergies from lower freight, because today we bring the tropical oils from Asia to Illinois and then back into our products.

So we'll avoid one leg of the freight and just be bringing in finished methyl esters. But the attraction for us in getting a foothold in Singapore, in addition to being located next to the tropical oil plantations, is that we can supply those methyl esters to our European and South American businesses, who today are lacking in their ability to participate in those downstream (inaudible) markets because they don't have an effective cost position. This will give them a building block to grow their business as well. So, it's a long-term position. It will not be accretive to earnings, certainly not this year and fairly modestly in 2012.

Understood. And back to your comment on North American capacity being a little tighter and obviously you have a little better share there. Was there a seasonal effect in the fourth quarter or maybe weather?

Well, it's typically much slower in the fourth quarter than the rest of the year, a combination a lot of chemical plants go down for maintenance turnarounds with the holidays in December. So, it just slows down and yes, weather's a factor. There's less cleaning going on in the fourth quarter than the outdoor seasons.

Okay. Perfect. And, I guess, lastly on the Brazilian currency with the new production there and that currency having a continue to depreciation, how to think about the impact there on that piece of the business, at least in the near-term.

Well, the incremental business in Brazil we're still targeting at least a range of $2 million to $3 million of accretion to earnings this year, pretax, in gross profit.

Thank you.

We have petty strong confidence in that, given the customer relationships we have for that take-away.

And is that -- I guess on that market, you're exporting from that market or is that all -- a lot of that going to be --

No, no, the vast majority of it is entirely for the South American market.

Okay, perfect. And in terms --

Very little is exported.

In terms of the competition, is it much of an import market or is it predominantly sourced locally?

Vast majority is sourced locally.

Perfect. All right. Well, I really appreciate your time, guys. Thanks and good luck to the year.

Thank you.

David Post from Point Lobos Capital.

Just wanted to ask one question on the North American surfactant market. It looked like your volumes were a little weaker this quarter, down somewhere in the 8% or 9% range. I can't remember exactly. And then also the margins were down as well. Just trying to kind of understand what the reason for the volume weakness was, particularly given if margins were lower, just trying to understand what's going on in North American market and if there was sort of onetime items you can point out for the volume weakness or is it something that --

Well, we certainly hope they're onetime items. What we're getting, the feedback we're getting from our customers is that there was a slowdown in retail sales as the quarter closed and they experienced it as well. And then on top of that, we certainly saw people doing a lot of inventory reductions, partly for their own balance sheet purposes. So there is some potential that customers are using less surfactant in their finished product. As they try and offset some of the higher raw material costs, one of the ways to do it is certainly to put a little less active ingredient in your bottle and save some money there. So we're very interested in seeing how that -- if that's a factor in the ensuing quarters. Today as we're sitting here, we're seeing volume is reasonably healthy as the year gets started, but it's certainly something we've got our eye on and our pricing strategy has been to try and keep the prices up. So, certainly there's probably been some competitive volumes lost. We've tried to target that in the lower margin commodities, but -- so, no, we're still fairly optimistic that it was largely a fourth quarter phenomenon.

Where are you in terms if you want to pass on further price increases that there will be sort of a (multiple speakers).

We've got fairly significant price increases announced for February 15, across a good portion of the surfactant space. So we're trying to stay on top of it within the quarter and not waiting for the end of the quarter.

Okay. But do you worry that will push volumes? That that will result in decline in volumes, because they put in less of the active ingredient or is that --

We're -- the whole competitive landscape is faced with the same raw material increases, so no, we're not overly concerned about that. Certainly if they use -- if they want to reformulate, but at least in the large consumer brand companies they don't want to jeopardize the performance of their brands, so I think we're optimistic that we've seen -- that we're not going to see a significant increase in the deformulation.

That was basically the only question I had. Thank you guys.

Thank you.

(Operator Instructions). Gregory Macosko from Lord Abbett.

Could you talk a little bit about the conversion you made in the biodiesel reactor to produce surfactants and the like. Is that the Singapore facility you're working on? How is that going?

Okay. Well, let me clarify that, because we actually were in the biodiesel business at our Illinois plant. So we had a biodiesel plant there that was -- it was capable of making other traditional surfactants. So, we made very little biodiesel in the last two years once the margins disappeared on biodiesel. And we continue to use that almost primarily for other surfactant intermediates in our core business. The Singapore plant site was a biodiesel business that had been shut down by its prior owner and that's what made it attractive to us. We were able to go in and pick up an asset that we knew we could convert the chemistry there by adding a fractionation column to make methyl ester derivatives. And so that's what we're doing today, is we're converting that plant from a biodiesel plant into a methyl ester derivative facility.

And that's the one that will be producing in 2012?

2012, correct.

Okay. And everything is -- in terms of that other biodiesel conversion is going well in Illinois then?

Yes. We don't see significant signs that there would be a significant return of margin to the biodiesel business even after they restored the dollar a gallon excise tax credit, the margins just have not been -- have not restored themselves to a level that we would find attractive to participate in.

Okay.

We will continue to diversify that asset into other production.

And you mentioned last quarter that pricing, particularly in Europe, was somewhat a little difficult and you'd been raising prices. I guess you're continuing to raise prices there, but it's still being a little bit tough, is that the point?

There still is somewhere between 20% and 30% overcapacity in Europe and we're a fairly small player in Europe. While we have -- in North America we may have a 60% market share of the merchant market for surfactants, in Europe we're certainly well below 10%. We don't have much pricing leverage in Europe. It's certainly a more competitive landscape.

Okay. But in Europe, it was -- you added capacity in polyols or --

Matter of fact it -- yes, that was polyols.

Okay.

So, we're seeing a significant growth in demand for our polyol as the European community has adopted more stringent insulation standards and so we've been very successful in capturing a major share of that market growth. And that's why we expanded the German plant. And then a polyol plant in Poland became available and that makes a broader product offering than our traditional polyol that we sell into the insulation market. And so we acquired that plant to give us a broader product offering.

And the pricing in polyol is good and rising? How's that going?

It's good. This is an area where we have -- our growth in market share has been predicated upon a product that performs very well in terms of insulation factor, fire retardency and ease of handling within their board stock plants. So it's been a performance advantage to us that I think has allowed us to capture a significant market share. Now, that being said, there's only so far you can go on premium pricing before you start to run the risk of losing some volume, but we have certainly not hit that wall. We are -- we grew volumes significantly last year in polyol and expect to again this year.

And with regard to your partner in the Philippines, I believe you have been acquiring their equity. Are you continuing to buy them out? Is that -- ?

We're up to 89% and we will probably entertain discussions with them to secure the balance of it. But right now we're at 89% and so we have significant control of the operation.

And finally --

That's been a very -- that's been a nice story. We had some significant downward pressure on profits in the Philippines three, four years ago and we've turned that around very nicely and it's profitable now and we expect to actually increase that profitability in the next year.

Okay. And then finally, with regard to the venture with NALCO, could you just give us an update. I know that seemed to be a good relationship there. Could you update the pieces of it? I know that you were talking about oilfield injections and how's that going?

It's going well. It's going a little more slowly than we had first hoped. The joint venture is really a commercial development project, so it's largely an expense laboratory and expense for us, it's largely expenses. We are then selling our surfactant to the oilfield customers largely from -- as a result of the TIORCO consulting with oilfield operators and so we book that profit in our segment gross profit. For the full year we did finally cover our cost of the joint venture, but we would like to get it profitable. We see continued interest. The recent rise in crude oil will certainly continue people's interest in doing pilot. We've got one commercial flood going on. We have many pilot floods going on. We're still very optimistic about it, but the pace of commercial flooding is slower than we would have liked. But we're still very bullish on it, the long-term prospects, because we still see oil long-term being north of $100 a barrel.

And how many people do you have dedicated to that area at this point?

Well, we internally on the Stepan payroll probably have between R&D and marketing probably less than 10 people and the joint venture probably has about, I'm a little soft on this number, but around 25 people, I think.

Okay. All right. Thank you very much.

The joint venture people are largely technical people doing the R&D work and examining core samples and recommending solutions to our customers.

And NALCO is still strongly behind that arrangement?

They are very bullish on this whole project, yes.

Okay. Thank you very much.

Thank you.

(Operator Instructions). Justin Speer from Invesco.

I forgot to ask a question on the insulation end market. That's been a pretty tough market for obvious reasons, but looking at, particularly on the residential side, the expectations at least here domestically for housing starts in particular, it looks like we could see pretty interesting compelling growth, maybe not necessarily this year, but as we start looking into the out years. There are cases being made of mid to high teens, even 20% annualized type volume numbers for housing starts. You're still only going to be getting to the low end of the historical range. Maybe walk through that scenario for us, if that is a plausible scenario, how to think about it.

Yes, I've got to caution you. We're very, very small part of our business ends up in residential. We're largely commercial. So flat roof, large retail warehouse and manufacturing buildings. And probably two-thirds of that volume is replacement roofs, so that bodes well for us because there's a natural obsolescence to a roof and when they replace the roof they replace the insulation. And then as they replace it they're replacing it today typically with a thicker layer of foam to get a greater energy savings. But we're not a big player in residential, so if you're looking at the residential statistics it wouldn't have a very big impact on our volumes.

Correct. But indirectly would there be an impact? And then typically you see residential lead commercial, commercial tends to be a little later cycle.

I'll sign on to that. We hope that's correct, because we would love that. I think in North America, at least, there's clearly been overbuilding of commercial, so it may take a little more time. The lag behind residential probably might be a little bit longer.

Okay.

But what's really helping us is the energy standards. So when people replace their roofs in Europe and North America, as I say, they're putting down a thicker layer of insulation.

Perfect.

Yes,.

Thanks again.

We certainly hope we're past the bottom. We had a significant increase last year and we expect the continued double-digit growth in polyols.

Perfect. Thanks again, gentlemen.

Sure.

Beverly Machtinger from Grace and White.

I was wondering if you could talk a little about the Latin American market and I know you only have, I think, one facility in Brazil. I guess, its utilization right now and where you see that whole market going and will you be expanding further outside of Brazil or building something further there?

Well, prior to Brazil we had a plant. We have a plant in Colombia that we've had for quite some time. It services primarily right in the Northern part of South America, bulk of the business in Colombia, but some in Venezuela and the other countries in the area. The Brazil is -- was really -- we acquired a plant from Unilver with a contract to supply some of their needs and then diversify the plant into the merchant market in Brazil and surrounding area. What's been attractive about it is the market in Brazil is growing much more rapidly than the Europe and North America.

And so there's -- and there's still a transition that we're anticipating of going from the [stynam] of moving consumers from soap bars to powders to liquids is what really happened in North America and Europe. We expect that to happen in Brazil. As that happens, they use a significantly higher degree of surfactant type products that we make and so we're following the transition of the market in Brazil and then bringing our full product line down into Brazil. So as that economy continues to grow, we see great opportunity. The neutralizer that we put in last year, we actually believe will be sold out by the end of this year. So, we have very strong feelings about the opportunities down there.

So what would you -- what would be the next phase then for growing that, growing your -- ?

Probably a second site is a possibility, either further debottle necking at our current site or a second site in Brazil.

Okay. And it would be in Brazil. You wouldn't look for a different location or is Brazil more centralized so that you can service the whole Latin American market from there?

A good part of it, not all of it. Certainly the north and south of South America are pretty -- freight -- there is a pretty big freight barrier. So you really would be looking at Chile and Argentina and Uruguay. But more then likely for the near-term we would be shipping from Brazil rather than adding capacity in those regions.

From your past experience in Europe and North America, how long do you see it taking for the transition from, I hate to use the term old fashioned bars, but from bars to liquid?

Well, it will be gradual over five to 10 years to get everybody. Some people will be die-hards and will continue to love powders and not want to switch, but if you think about North America, over a 30 year period of time we went from, say, 80% powders and 20% liquids to just the reverse. So it will take some time but it's a great trend for us in the marketplace there.

Okay. Great.

(Operator Instructions). And Mr. Hurlbutt, we have no questions at this time. I'll now turn the conference back to you. Please continue with your presentation or closing remarks.

Okay. No, I just want to thank everybody for participating in today's call. Thank you very much. Bye-bye.

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.