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Stepan Earnings Call Transcript

April 27, 2023

Stepan Company (SCL) Q1 2023 Earnings Call Transcript

Apr. 25, 2023 2:05 PM ETStepan Company (SCL)

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Q1: 2023-04-25 Earnings Summary

EPS of $0.71 misses by $0.23 | Revenue of $651.44M (-3.53% Y/Y) beats by $1.70M

Stepan Company (NYSE:SCL) Q1 2023 Results Earnings Conference Call April 25, 2023 8:00 AM ET

Company Participants

Luis Rojo – Vice President and 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 first quarter results. To begin, I will share our first quarter highlights and strategic outlook, while Luis will provide additional details on our financial results.

The company reported first quarter adjusted net income of $16.4 million. Earnings was significantly impacted by a 14% decline in volume, driven by softening market demand, delays in the startup of new low 1,4 dioxane production assets, and continued customer and channel destocking across most of our markets.

Our margins were in line with expectations despite high cost inventory carryover from the fourth quarter and increased competitive activity within certain end use markets. Despite ongoing inflationary pressures and higher cash expenses related to the construction and pre-commissioning activities of our new alkoxylation investment in Pasadena, Texas, and the startup of our new low 1,4 dioxane capacity in the US, we kept cash expenses consistent year-over-year.

For the quarter, adjusted EBITDA was $48.7 million, down $31 million versus Q1 2022, primarily driven by the decline in sales volume.

Polymers operating income was $10 million, a decrease of $4 million versus the prior year or 28%. This decrease was primarily due to an 18% decline in global sales volume, led by a 19% volume decline in rigid polyols. Lower phthalic anhydride volumes were partially offset by slightly higher specialty polyol volumes. The lower demand in rigid polyols reflects customer and channel inventory destocking and lower construction related activities.

Luis Rojo

Now turning to Polymers on slide 7. Net sales were $161 million for the quarter, a 14% decrease versus the prior year. Global volume declined by 18%, primarily due to a 19% volume decline in rigid volumes. This was partially offset by double-digit volume growth in China and mid-single digit growth in North America CASE business. The lower demand reflects customer and channel inventory destocking and lower construction-related activities.

Selling prices increased 8% primarily due to the pass-through of higher raw material and input costs. Foreign currency translation negatively impacted net sales by 4%.

Polymers operating income was $10 million, a decrease of $4 million versus the prior year. The decrease is primarily due to the 18% decline in global volume. North America and Europe results were impacted by lower volumes. Asia results improved on increased demand following the reopening of China.

Scott Behrens

These slides describe our strategic priorities and operating principles for shareholder value creation. We believe our growth strategy is properly aligned to attractive growth vectors within our core markets, and we are committed to delivering greater productivity through efficient allocation of resources to increase value creation for shareholders.

Our customers will always remain at the center of our strategy and innovation. Our longstanding tier 1 customers value our technical capacity and the ability to manufacture and deliver quality products at the scale they need. We continue to diversify our customer base by expanding our global reach to tier 2 and tier 3 customers who highly value the technical support and services that Stepan can provide.

Insulation remains one of the most critical enablers to a more sustainable and energy efficient world. Our Polymers business continues to focus on developing the next generation rigid polyol technologies that can increase the energy efficiency and cost performance of our customers’ insulation products. We are also focused on the spray foam market as it offers attractive diversification and growth for Stepan’s polyol.

Moving to slide 11, construction on our new alkoxylation production facility in Pasadena, Texas, is approximately 25% complete and has surpassed 250,000 hours of construction without an injury. This asset will be a flexible state-of-the-art multi-reactor facility, with approximately 75,000 tons per year of annual alkoxylation capacity and will provide strategically located capacity and capability for long term specialty alkoxylate growth across our strategic growth end markets, including agriculture, oilfield, construction and household and institutional cleaning. We expect the plant to start up in the fall half of 2024.

The underlining alkoxylation business that supports the Pasadena investment continues at strong double-digit volume growth and at attractive margins. As you know, we are increasing North American capability and capacity to produce ether sulfates that meet new regulatory limits on 1,4 dioxane with network completion expected by the end of the second quarter. While we have had some challenges and delays associated with the startup of the initial investments, we believe key learnings will afford efficient commissioning and startup of the remaining new installations. New contracted volume associated with the second quarter asset startup should drive volume growth in the second half of 2023.

Once completed, Stepan will have the largest installed low 1,4 dioxane production capacity serving the North American merchant market, which will enable Stepan to maintain and grow our North American sulfonation business in 2024 and beyond.

Mike Harrison

I was wondering if we could maybe start with some discussion on the raw material and inflationary front. I’m just curious, is the inflationary pressure that you saw in Q1 related to working through some of the high cost inventory that you still have within your system? Or is it related to changes in market prices for your raw materials? I guess I’m curious, are you seeing market pricing today for raws stable, increasing or decreasing?

Luis Rojo

You are 100% correct. What you saw in Q1 was we are still depleting high cost raw materials that we have in the system. Also, because of the fact that volumes have been depressed in Q4 and Q1. So, just to provide more perspective to that point, we saw an impact of around $7 million to $10 million pretax in Q1 due to high raw cost. And we believe we’re going to need at least Q2 to finish the depletion of some of these materials, especially in the polymers business.

So, now to your questions on raw materials, we saw the deflation in Q4 and a little bit more in Q1 and what we see now is more stable prices. And these can continue to be very volatile. We have seen oil going back up. So, we’re going to see more volatility up and down probably in the next few quarters, but right now what we see is very stable raw materials versus Q1. But again, one of the key impacts of our results in Q1 is this high raw material.

Vincent Anderson

What exactly do you need to do to position yourself in spray foam? Is that just about like finetuning a formulation to include blowing agents or a purity component? I’m just wondering what that requires of you and what that might mean for time to market?

Scott Behrens

It’s a slightly different formulation than what we’re historically been supplying into the rigid market. So our formulation chemists are obviously working with customers in that market to meet their specific performance requirements. Some of those customers have very specific and unique formulation. So this is a traditional technical service collaboration with customers in the Springfield market that view Stepan as potentially bringing value, consistency, high quality product to their businesses. So it’s a standard process. And it takes many months and qualification trials before you become approved and start supplying.

Vincent Anderson

But at the end of it, this was a collaboration effort. So the sales will be there.

Scott Behrens


ike Harrison

Just a couple more. First on the Polymers business. It seems like you expect destocking to continue at least into the second quarter. Can you talk a little bit more broadly on what you see happening with underlying demand? It seems like from what we’re seeing in the headlines, residential housing is a big concern heading into the rest of this year. But the non-resi side of construction seems like it’s holding up a little bit better. I was curious what you guys are seeing in your business, given that it’s mostly non-residential?

Scott Behrens

You’re correct. The underlying demand in the market seems to be healthy. If you look at Q1, there were a lot of weather events. When you think about the rain on the West Coast, you think about the strong winter up in the upper Midwest and Northeast, that did have an impact on the ability to get jobs done, replacing or building new roofs. But underlining that, as Luis mentioned a little bit earlier, there is a lot of inventory throughout the chain. When you look at those contractors, which is a very fragmented market across the United States, we’re understanding there was a lot of inventory sitting around the country as jobbers would be bidding on work, but needed to guarantee that they had supply of materials. So that is what we believe the industry is working through.

The good news is I think there’s pent up demand. The activity for reroofs and new roofs is out there. We need to continue to work through that destocking of inventory in Q2 and then I think we’ll see recovery in the second half.

Mike Harrison

Also, in Polymers, you noted that the CASE business or that specialty polymers business in North America was showing some volume growth. Is there a chance that we see you guys reemphasize that specialty side of the polymers business, as we kind of navigate this challenging period for the rigid polyols side of the polymers business?

Scott Behrens

No, I wouldn’t expect to see significant movement on the specialty CASE side. We an important player in the market, but our strategy remains focused on the energy efficiency within our polymers business.