The Urethane Blog
October 19, 2023
Stepan Company (SCL) Q3 2023 Earnings Call Transcript
Company Participants
Luis Rojo – Chief Financial Officer
Scott Behrens – President and Chief Executive Officer
Scott Behrens
Good morning and thank you all for joining us today to discuss our third quarter results. I plan to share highlights from our third quarter performance and will also share updates on our key strategic priorities, while Luis will provide additional details on our financial results.
The company reported third quarter adjusted net income of $14.7 million. Earnings were significantly impacted by a 9% decline in sales volume versus the record prior year third quarter due to continued demand softness across most of our markets and continued inventory destocking in certain market channels.
In the third quarter, Surfactant unit margins were lower versus the prior year, due to less favorable product mix, high cost raw material inventory carryover and pricing pressure in Latin America from imported products. Volumes in Latin America grew by high-single-digits, compared to the second quarter. Specialty Product unit margins were significantly lower due to high-cost inventory and pricing pressure related to increased MCT import activity.
Expenses were slightly lower versus prior year due to proactive headcount and discretionary expense controls implemented earlier in the year and lower incentive-based compensation approvals. We recorded a $4.1 million after-tax restructuring reserve for the transition of employees participating in our voluntary early retirement program. We continue to make significant progress on our cash objectives, reducing our inventory levels by $55 million. Finally, we completed our low 1,4 dioxane capital investments and continued our alkoxylation project in Pasadena, which is expected to be operational in mid-year 2024.
For the quarter, adjusted EBITDA was $48 million versus $85 million in the prior year quarter, primarily driven by the decline in sales volume. Adjusted EBITDA in the third quarter of 2023 was slightly higher than the second quarter of 2023 adjusted EBITDA of $46 million. Surfactant operating income was $15.4 million versus $39 million in the prior year and $15.1 million in the second quarter of 2023. The decline versus prior year was primarily due to a 7% decline in global sales volume and lower unit margins in Latin America, driven by competitive pressure from imports.
Demand within the agricultural end market remained low, due to continued customer and channel inventory destocking. Polymer operating income was $21.8 million versus $31.9 million in the prior year and $16.3 million in the second quarter of 2023. The decrease versus prior year was primarily due to a 12% decline in global sales volume, driven by a 10% decline in Rigid Polyols. Unit margins for global polymers remain in line with previous year.
Luis Rojo
Thank you, Scott. My comments will generally follow the slide presentation.
Let’s start with the slide four to recap the quarter. Adjusted net income was $14.7 million, or $0.64 per diluted share, versus a record $46.3 million, or $2.01 per diluted share, in the prior year. Because adjusted net income is a non-GAAP measure, we provide full reconciliations to the comparable GAAP measures. This can be found in Appendix 2 of the presentation and Table 2 of the press release.
Specifically, the adjusted net income for the third quarter, exclude deferred compensation income of $2.1 million versus $1 million of income in the prior year. It also excludes business restructuring of $4.3 million of after-tax expenses. This business restructuring reserve is driven by the company’s voluntary early retirement program. The deferred compensation figures represent the net income related to the company deferred compensation plan, as well as cash-settled stock appreciation rights for our employees. Because these liabilities change with the movement in the stock price, we exclude this item from operational discussion.
Slide five shows the total company net income breach for the third quarter, compared to last year third quarter, and breaks down the decrease in adjusted net income. Because this is net income, the figure is not here and on an after-tax basis. We will cover each segment in more detail, but to summarize, we experienced lower operating income in all segments versus prior year.
Now turning to polymers on slide seven. Operating income for polymers was $21.8 million. We continue delivering sequential growth quarter-on-quarter, driven by mid-single-digit volume growth. Volume increased 6% versus the second quarter of 2023, driven by high single-digit growth in global Rigid Polyols. This was partially offset by a 25% decline in our commodity PA business. Finally, specialty product operating income was $2.4 million, down versus the second quarter of 2023 at $3.8 million. This reduction was primarily due to order timing differences.
Vincent Anderson
Okay. No, that’s helpful. If I could shift over to Polymers. It was kind of looking to just get your thoughts on where you are with some of the opportunities in Polyols. Maybe a bit longer term, but thinking about spray foam products and then maybe any progress towards converting a former INVISTA asset to run PA. Just curious if you’ve been able to push those a little bit harder in this weaker demand environment or if that’s something that we should return to maybe next year?
Scott Behrens
Yes. Vincent, I would say our activities with our prospective customers in spray foam continue at a very robust pace. I do think that market has been impacted by the overall market conditions, but that has not stopped our pursuit of new customer approvals, and that business and the outlook is still positive from our perspective. With regards to PA, there are no plans or intentions to put PA into the INVISTA assets. Millsdale is our PA production site, and that will remain our only PA production site going forward.
Vincent Anderson
Okay. I was — I apologize if I was unclear. I was referring to using your Millsdale PA as a feedstock into one of the INVISTA plants. Not…
Scott Behrens
We did the integration of the business in ‘21. Vincent, so whatever raw material and operational synergies that we’ve gotten though were taken care of in 2021.
Vincent Anderson
Okay. All right, that is all from me. Thank you. Thank you very much.
David Silver
Yes, hi. Thank you very much. I’ll stipulate here. I did have to step away for a couple of minutes during your remarks, so I apologize if I make — apologize in advance if I make you repeat yourself.
I did want to maybe just start with the Polyols segment. And in particular, I did want to talk about — ask you about the improvement in a couple of areas. So the per unit margins, I guess. So, sequentially — on a sequential basis, you had higher operating income and I think, kind of, flattish or slightly better shipment volumes. And then I did pick up on the comment about improvement from China, and assuming that these products are mainly used in the construction area. You know, I was kind of scratching my head and wondering if you could provide a little color. I mean, I wasn’t aware that the construction segment in China in general was especially robust now. So, just a couple comments there would be helpful. Thank you.
Scott Behrens
Yes. Good morning, David. Regarding unit margins in Polymers, so we have been reporting in the last couple of quarters, you know, we’ve had a significant raw material headwind. And as we continue to work through those raw material headwinds matching our pricing structure. You know, our margins, we believe, are now stabilized. And you can see the sequential volume growth between Q1 to Q2, and now Q3 — Q2 to Q3. We do believe that the stocking has run its course and we’re back on a positive trajectory towards more and more normal market demand in the Polymer space.
As it relates to China, since that asset was fully commissioned three, four years ago, we’ve been on a diversification strategy of unused markets and applications. And I think what you’re seeing is the result of our team’s efforts in bringing a much broader diversification of markets and product technologies to that site.
Luis Rojo
Yes, remember, we use that site, it’s a different end market when you think about [coal] (ph) storage and all of that is not typical insulation that we do here in the U.S. or Europe. And on top of that, the team has done a fantastic job diversifying to other businesses, and using the assets in different end markets. And that is what is driving a very strong double-digit growth in Q3.
David Silver
Very good. Thank you. And I did just want to pick up on Scott’s comment about destocking being largely completed, I guess on the Polymers area. But I think, if I mess that with the comments in the press, I mean, you are still pointing to inventory liquidation and destocking into the fourth quarter, I believe. And I guess that would make maybe at least four, maybe five quarters where destocking has been in effect.
And you know, from a big picture perspective, should the fourth quarter be, I don’t know, the bulk of having the destocking behind us. And I did notice you know, there’s customer destocking and then there’s your own inventory drawdowns. I was just wondering if you might be able to draw a contrast between the two?
Are the customers largely through it, but maybe there’s going to be a big reduction at the company level or how would you just characterize the overall progress in draining, I guess, this overall supply chain of excess product maybe built up during the pandemic and during some concerns over supply chain reliability. Thank you.
Luis Rojo
David, so what Scott was mentioning was destocking is almost done in the Polymers business. There is a pocket in the West Coast, due to rain and other activities where not all the construction activities were able to be executed. So there is a small piece there remaining, but most of the destocking in Polymers is already flushed through. What you see in Q4 in Polymers is the normal seasonality of the business, right. If you go back five, 10, 20 years, Q4 is our lowest quarter in term of demand, because of course, a lot of winter state don’t execute a lot of reroofing activities during the winter. So, that’s only seasonality.
And then when you look at surfactants, we have — what we are seeing is destocking is mostly done in all the cleaning personal care markets. And what is remaining is ag. We believe ag will continue, the destocking in Q4 and we will have more perspective in February, how we see Q1 and Q2.
Scott Behrens
In the ag destocking, lagged the consumer and Polymer’s destocking activities by almost two quarters.
October 18, 2023
VPC Group Inc.VPC Group Inc. 2,340 followers2,340 followers
VPC Group Acquires Prestige Fabricators in Strategic Expansion into US Markets.
VPC Group, a leader in the production of both foam and fiber materials has successfully acquired the assets of Klaussner’s subsidiary, Prestige Fabricators, as part of Klaussner’s asset liquidation.
This acquisition marks a significant milestone in VPC Group’s growth strategy, enabling them to expand their foam pouring and fabrication footprint beyond its historical origins of Canada, into the US market.
With a strong reputation as a customer centric partner in the bedding and furniture industry, VPC Group is known for its commitment to quality and service and has emerged as the market leader in North America.
The acquisition of Prestige Fabricators reinforces their position in the industry, both in Canada and the United States.
VPC Group currently operates 20 state-of-the-art facilities across North America. This includes foam pouring, foam fabrication and fiber processing facilities.
The addition of Prestige Fabricators and their recent acquisition of Fibrix LLC, clearly demonstrates VPC’s commitment to expanding their product offerings and reach in the North American market.
The acquisition of Prestige Fabricators will expand VPC footprint and strengthen and enhance VPC Group’s capabilities to better serve their customers with a broader range of foam products.
https://www.linkedin.com/feed/update/urn:li:activity:7119717013287038976/
October 18, 2023
Stepan Company Q3: Earnings Miss, Lower Sales Volume, Dividend Hike & More
by Nabaparna Bhattacharya, Benzinga Editor
October 18, 2023 10:03 AM | 2 min read
Stepan Company
SCL+7.03%+ Free Alerts reported a third-quarter FY23 sales decrease of 22% year-on-year, to $562.226 million, missing the analyst consensus of $603.72 million owing to lower selling prices.
Adjusted EPS of $0.64 missed the analyst consensus of $0.75.
Net Sales from Surfactants fell 21% Y/Y, Polymers down 21%, and Specialty Products plunged 36%.
The lower selling prices were mainly attributable to the pass-through of lower raw material costs, less favorable product/customer mix, and competitive pressures.
Gross profit declined 39.9% Y/Y to $71.24 million. Total company sales volume decreased 9% versus the prior year.
Demand within the agricultural end market remained low due to continued customer and channel inventory destocking.
Adjusted EBITDA was $48 million versus $85.5 million in the prior year.
“Specific to the third quarter, Surfactant unit margins were lower versus the prior year due to less favorable product mix, high-cost raw material inventory carryover, and pricing pressure in Latin America from imported products. Specialty Product unit margins were significantly lower due to high-cost inventory and pricing pressure related to increased MCT import activity,” said Scott Behrens, President and Chief Executive Officer.
Dividend Raised: Stepan Company approved an increase of $0.010 per share, or 2.7%, on its quarterly cash dividend on its common stock. The dividend of $0.375 per share is payable on December 15, 2023, to common stockholders of record on November 30, 2023.
Outlook: The company expects the fourth quarter of 2023 to face challenges, including continued destocking within the agricultural end market and the normal low seasonal demand for Rigid Polyols.
Stepan Company expects to deliver $50 million in pre-tax savings in 2024, which will help offset future inflation and increased expenses associated with the planned commissioning of new Pasadena alkoxylation assets.
October 16, 2023
Covestro expands capacity for TPU films in Germany
MRC — Covestro has expanded its production capacities for thermoplastic polyurethane (TPU) films in the Platilon® range, as well as the associated infrastructure and logistics in Bomlitz, Lower Saxony, Germany, said the company.
This site of Epurex Films, a wholly owned subsidiary of Covestro, houses research & development, application development and production for the semi-finished products. The company has invested a low double-digit million Euro amount in the expansion of the center of excellence for TPU-Films.
The new capacity is intended to meet the growing global demand for multilayer TPU films. They are used in automotive interiors and construction, among other applications. Breathable, water-impermeable specialty films have also proven their worth in wound care and outdoor clothing.
“With this capacity expansion, we are strengthening our Bomlitz site and our position as a leading supplier of technical specialty films,” said Dr. Thorsten Dreier, Covestro’s Chief Technology Officer, at the inauguration. “At the same time, we are investing in promising technologies and applications and creating new jobs.”
For Aleta Richards, global head of the Specialty Films business entity, the expansion offers opportunities to respond even better to individual customer needs and offer more sustainable products. “For some time now, we have also been developing customer-specific solutions with films made from alternative raw materials, as we are also seeing increasing demand in this area. The development and production of partially biobased products is therefore to become a new focus at the Bomlitz site.”
Covestro is fully geared toward the circular economy and aims to become climate-neutral by 2035. In 2022 the Bomlitz site has switched its power supply completely to green electricity. Epurex Films is one of Covestro’s three competence centers for specialty films in Germany, along with Leverkusen and Dormagen.
We remind, Covestro is expanding its production capacities for thermoplastic polyurethane (TPU) Films in the Platilon® range, as well as the associated infrastructure and logistics. To this end, the company is investing a low double-digit million euro amount in its German center of excellence for the aforementioned films in Bomlitz, Lower Saxony.
https://www.mrchub.com/news/409776-covestro-expands-capacity-for-tpu-films-in-germany
October 16, 2023
TDI Market is Poised to Take Off Amidst Intensive Maintenance Plans
PUdaily | Updated: October 13, 2023
Not long after the restart of Wanhua Chemical’s facility in Yantai, several TDI facilities have started or are about to undergo maintenance. The maintenance plans of TDI suppliers in the fourth quarter of this year are intensively scheduled.
Table 1: Recent TDI Facility Maintenance Plans in China and South Korea
| Juli Chemical | Maintenance started on September 25, expected to last about 40 days. |
| Wanhua Chemical | Rumored to start maintenance on October 6, expected to last about 15 days. |
| Yinguang Chemical | Temporary shutdown for maintenance on October 9. |
| Hanwha | Maintenance started on October 13, expected to last about 25 days. |
| Cangzhou Dahua | Maintenance scheduled to start on October 20, expected to last for 1 month. |
| Covestro Shanghai | Maintenance to start in mid-November, expected to last about 40 days. |
| BASF Korea | Maintenance to start on November 17, expected to last about 25 days. |
Although TDI suppliers have typically concentrated their maintenance plans in the fourth quarter in previous years, this year the maintenance at Wanhua Chemical and Yinguang Chemical have exceeded industry expectations, and Cangzhou Dahua did not undergo maintenance last year. The maintenance duration of the facilities at Juli Chemical and Covestro is also longer than in previous years.
Amidst the contradiction between intensive maintenance plans and the recovery of demand, TDI suppliers, especially Covestro, have frequently raised their guide prices:
- On October 7, Covestro raised its opening price for October and only offered 50% of supplies to distributors in November, while providing 80% to direct customers.
- On October 8, Covestro stopped trading due to strong demand and extremely low inventory.
- On October 9, the price offered by the North China plant was raised to CNY 20,000/tonne. Covestro raised its fixed price to CNY 19,200/tonne.
- As of the latest update on October 11, Covestro has stopped trading again due to tight supply…
Looking back at October last year, the price of TDI surged from CNY 19,000/tonne to surpass CNY 26,000/tonne due to tight supply. And in the same period this year, with the same supply significantly reduced, the price level remains the same… Stay tuned for the subsequent market trend!
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