Urethane Blog

Highlights from Stepan Earnings Call

February 21, 2023

Q4 2022 Stepan Co Earnings Call

Fri, February 17, 2023 at 5:02 a.m. EST·19 min read

Participants

Luis E. Rojo; VP & CFO; Stepan Company

Scott R. Behrens; CEO, COO, President & Director; Stepan Company

David Cyrus Silver; Senior MD & Director of Equity Research; CL King & Associates, Inc., Research Division

David Joseph Storms; Research Analyst; Stonegate Capital Markets, Inc., Research Division

Michael Joseph Harrison; MD & Senior Chemicals Analyst; Seaport Research Partners

Vincent Alwardt Anderson; Associate; Stifel, Nicolaus & Company, Incorporated, Research Division

Scott R. Behrens

Good morning and thank you all for joining us today to discuss our fourth quarter and full year results. To begin, I will share our fourth quarter and full year highlights and strategy outlook, while Luis will provide additional details on our financial results. Despite significant external supply chain challenges in a difficult macro environment, the business was able to deliver another record year. Significant inflation in raw materials, logistics and other expenses were fully offset with pricing actions, mix improvements and productivity efforts.

Michael Joseph Harrison

I was hoping that you could discuss some of the factors that drove the 17% volume decline that you saw in Q4? Maybe help us understand how those split out between destocking, underlying market weakness and other factors? And were there any key differences in the volume impacts, particularly from destocking as you look between the Surfactants business and the Polymers business.

Luis E. Rojo

Thank you, Mike. Look, as you rightly said, so when you think about the minus 17%, you need to think about those three buckets, right? One is demand, one is destocking and the other is the transition to low 1,4 dioxane product, which we clearly communicated in October that we lost a Tier 1 customer, and there are other impacts on the volume side related to the transition. So if you think about those three big buckets and you think about the minus 17%, roughly, each bucket is one-third. So think about 5%, 6% is the impact of each of them. And of course, when you think about polymers, you don’t have the low 1,4 dioxane transition, so you can see more than a half and half situation between the other two buckets. But that’s how we’ll summarize the three big buckets that we saw in the minus 17% in Q4.

Michael Joseph Harrison

All right. And I guess in terms of destocking, that can’t go on forever from your customers. Are you starting to see signs that order patterns are normalizing at some point here in Q1? Maybe talk about what you’re hearing from your customers in surfactants as well as in polymers.

Scott R. Behrens

Yes, Mike, I would say that it can’t go on forever as well. But I would say, incrementally, we may be seeing a little uptick versus what the pattern we saw in Q4, but I don’t think we’re done with destocking activities at this point. As you compare surfactants versus polymers, obviously, two different channels to the retail end use. I would say on the polymer side, it’s — once you get past the manufacture of the rigid insulation panels that our Polyols goes into, it’s a highly fragmented market of distributors and contractors across the country.

Vincent Alwardt Anderson

I just wanted to ask, given your existing alkoxylate portfolio and the PerformanX acquisition last quarter, how quickly do you think you can ramp and then fill the order book for the Pasadena facility once it’s up and running?

Scott R. Behrens

Yes. Good morning Vincent, from an alkoxylation perspective, we have two existing alkoxylation facilities here in the U.S. today. Pasadena will be our third. We also utilize a broad network of third-party toll manufacturers today that we have been using as capacity to continue to grow the product line, which has been doing very well, exceeding our expectations. So upon startup at Pasadena, we will have a very good opportunity to get that utilization up in balance with how we want to manage our external tolling network. So we have, I think, the ultimate flexibility to ensure the proper utilization of our internal assets and allow us to continue to grow using tollers as needed.

Vincent Alwardt Anderson

Perfect. And I’m not going to ask you to predict the future on raw materials and all of that. But if we continue along this slow demand environment through at least the first half of the year, is there any reason that we wouldn’t see a little bit of positive timing impact between price and raws like we’ve seen in past down cycles.

Scott R. Behrens

It’s hard to say, Vince. I would say that raw materials kind of plateaued in Q4. So it’s pretty stable right now. And whether it’s going up or down from here, it’s hard to predict. There’s too many factors that play into that. Our focus is really we will continue our pricing actions to cover our continuing any cost inflation that we have within the business and operations. So I think it’s wait and see, but we expect that we’ll continue with our pricing strategy as needed.

David Cyrus Silver

That’s great color, I appreciate it. My next question would be kind of about new products. And in particular, I think I’ve asked this question some time ago, but does Stepan track, I guess, or calculate internally a vitality index? In other words, percentage of revenues from products that have been developed in the last three years, the last five years, something like that. And if not, I was just wondering if you could call out from a revenue or from a margin impact, however you look at it internally.

Scott R. Behrens

Yes. So I’d first start with where we are focused on strategic end market growth. And that’s within the agricultural chemicals space as well as specialty alkoxylates. So in agricultural chemicals, we’re part of that development pipeline for new active pesticides. And that pipeline is anywhere from 5 to 10 years long for new products to come to market. So we’re deeply embedded in those development pipelines with the large pesticide producers out there, which is a really great place to be, and we have new products being launched in multiple regions (inaudible). The other big focus for us is in specialty alkoxylates.

Luis E. Rojo

What I would add, David, is we are investing and we are making good progress as Scott mentioned in the remark spray foam also. So we are working with new products there. If you think — we also talk about [Chemco] we are relaunching that product line. And actually, when you think about low 1,4 dioxane, right, that’s kind of at the end, a significant investment that we’re making to have a totally new ether sulfate portfolio that meets the new regulation, but that’s at the end, there’s a lot of new volume that is going to be in a new product versus the past.

David Cyrus Silver

Okay. Great. And I should have mentioned 1,4 dioxane, of course. Last question, and this would be on your marketing, and it has to do with your strategy for Tier 2, Tier 3 customer development. But you did mention, I think, a net addition customer base of about 550 for 2022. And I’m just wondering if we should think about a particular target for next year? And more to the point, do you think you’ve kind of, I don’t know, cherry-picked or high-graded the opportunities out there on the Tier 2, Tier 3 base of customers?

Scott R. Behrens

Yeah. No, David, great question. We’ve been, I think, pretty clear that growing this Tier 2, Tier 3 segment is a major portion of our company’s growth strategy. And we continue to invest in sales, marketing and R&D to support our continued growth with this segment on a global basis. We’ve identified that target for a prospective customer list in Tier 2, Tier 3 around the world in the tens of thousands. And becoming more efficient in reaching and securing orders from these customers around the world is our focus. And the $550 million is a good number. We’re proud of that, and that leads to improved profitability for our company. And that’s kind of our expectation going forward is our teams are going to continue to execute and deliver those new customers on a net basis in that hundreds per year.

https://ca.movies.yahoo.com/q4-2022-stepan-co-earnings-100228864.html

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