Urethane Highlights from Stepan Earnings Call
October 20, 2022
Stepan Company (SCL) Q3 2022 Earnings Call Transcript
Oct. 19, 2022 4:17 PM ETStepan Company (SCL)
Q3: 2022-10-19 Earnings Summary
EPS of $2.01 beats by $0.40 | Revenue of $719.19M (19.33% Y/Y) beats by $54.71M
Stepan Company (NYSE:SCL) Q3 2022 Earnings Conference Call October 19, 2022 10:00 AM ET
Luis Rojo – Vice President & Chief Financial Officer
Scott Behrens – Chief Executive Officer, Chief Operating Officer, President & Director
Good morning and thank you for joining us today to discuss our third quarter results. To begin, I will share our third quarter highlights and strategy outlook and Luis will provide additional details on our financial results for the quarter.
The third quarter continued to be a challenging operating environment given continued raw material constraints, the energy crisis in Europe, cost inflation, foreign currency exchange impacts from a stronger U.S. dollar and overall global macroeconomic uncertainties. Nonetheless, I am proud of how our team has continued to overcome these challenges by delivering record results for the third quarter. Reported net income reached a record $39.4 million or $1.71 per diluted share, while adjusted net income was a record of $46.3 million or $2.01 per diluted share. Surfactant operating income was $39.0 million compared to $34.5 million in the prior year quarter. Growth was mainly driven by a better product and customer mix, partially offset by an 8% decline in global volume.
Our Polymer segment reached a record operating income of $31.9 million compared to $19.8 million in the prior year which represents a 61% increase driven by margin recovery and improved mix. Our Specialty Products segment also had a record quarter, growing operating income to $9.7 million, representing a $7.3 million increase over prior year. Our Board of Directors declared a quarterly cash dividend on Stepan’s common stock of $0.365 per share, payable on December 15, 2022. And — this represents a 9% increase in our dividend and Stepan has paid and increased its dividend for 55 consecutive years. During the third quarter of 2022, the company paid $7.5 million of dividends to shareholders and repurchased $5.3 million of company stock. During the first 9 months of 2022, the company paid $22.5 million in dividends and repurchased $22.3 million of company stock. The company still has $127.7 million remaining under our share repurchase program.
Looking forward, we believe the operational environment will remain challenging. However, we are confident that we can deliver another record year. At this point, I would like Luis to walk through a few more details about our third quarter results.
Now, turning to Polymers on Slide 7. Net sales were $215 million, up 8% from the same quarter last year. Selling prices increased 26% due to the pass-through of higher raw material and logistics costs and recovering margins. Volume decreased 10%, driven an 8% decline in global [indiscernible] volume, primarily due to softening demand in Europe. Foreign currency translation negatively impacted net sales by 8%. Polymers delivered a record operating income for the quarter of $31.9 million which represents a 61% increase versus prior year. This is primarily due to margin recovery and improved mix which was partially offset by the 10% decrease in global volumes. North America Polyol and PA income increased driven by margin recovery and mix improvement. The decrease in Europe was driven by FX and volume reductions. China operating income was down slightly due to suppressed demand from the COVID lockdowns and restrictions.
Our Millsdale plant continues to be one of our key priorities. We are accelerating investments to improve productivity and reliability and to increase capacity through operational excellence initiatives. These investments will continue throughout the year and we expect to see benefits from our efforts and investments starting next year. One of the key priorities at Millsdale is the execution of our low 1,4-dioxane project.
Moving to Slide 11. Work continues on our new alkoxylation production facility in Pasadena, Texas. This asset will be a flexible state-of-the-art multi-reactor facility with approximately 75,000 tons per annum of annual alkoxylation capacity. It 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 be up and running in early 2024. The underlining alkoxylation business that supports the Pasadena investment continues its strong growth and at margins above our original projections.
We remain confident and excited about our investment in Pasadena. The recent acquisition of performanX alkoxylates business should deliver additional baseload volumes for Pasadena in the future and the chemistries are well known by Stepan. This acquisition is a strong fit within Stepan Surfactant business and provides attractive market diversification opportunities for our alkoxylation product line. The acquired surfactants are supplied to key customers and end markets covering personal care, pulp and paper, lubricants, household institutional cleaning, oil and gas, agricultural and other industrial markets. We are excited to expand our customer base in some of these new end use markets for Stepan.
As you know, we are increasing North American capability and capacity to produce either sulfates that meet new regulatory limits on 1,4-dioxane by the end of January 2023. The 1,4-dioxane is a minor byproduct generated in the manufacture of ether sulfate surfactants which are key cleaning and foaming ingredients used in consumer product formulations. Stepan is working to supply customers with either sulfates that meet the new regulatory requirements. As part of this transition, one key customer chose to invest in internal production capabilities so that lost volume was recognized starting in the third quarter. However, we have gained volume with other customers and we’ll continue focusing on strategic priority of growing within our Tier 2, Tier 3 customer segment. We expect this transition to go through 2023 and our focus is on generating value growth. The good news is that the overall market continues to believe that either sulfates which meet the new regulation levels for 1,4-dioxane are the best alternative for performance and costs.
Okay, great. And then just last question. I mean, this is something I just have noticed in the headlines over the last week or 2. But water levels, this is in the U.S. logistics but the water levels on the Mississippi are such that barge and vehicle vessel traffic is being disrupted. So thinking about Millsdale and maybe some of your other — or maybe your flow of raw materials — is that creating unusual issues for you? Are you kind of diverting to different modes of transport as a result? Or is that just — is that something you’re able to manage without too much difficulty, thank you.
Yes. We — yes, great question. And yes, we’ve been operating our plants on the Illinois River, the Des Plaines River for 50 years and we have very robust contingency plans in our sourcing and planning groups work with very closely with our raw material suppliers to ensure alternate modes are available into the Chicago area. So not an impactful…
Yes. No major impact.
Okay. And then the last one I had is on polymers. I was just hoping you could give a little bit more detail on what you’re seeing in terms of demand trends as we’re getting into Q4. Obviously, the 10% volume decline in Q3 suggests that you’re definitely seeing some things getting worse. Curious if some of that is customer inventory destocking that might be a little bit more temporary but anything you can share on near-term demand in the construction-related portions of polymers would be appreciated.
Yes. I think as we all read what’s happening in Europe, specifically in the construction markets, there is a slowdown happening. Projects are being put on hold or canceled which is really what’s driven our volume decline in polymers in Q3. And then the continued kind of lockdowns in China have also significantly impacted demand. Where is it look sequentially quarter-over-quarter into Q4, we’re kind of expecting a lot of the same for Q4. And I think the overall hope is that there’s maybe a two or three quarter, call it, a hiatus and expecting growth and recovery in the construction markets in Europe in the second half of next year. I think that’s kind of a general consensus right now across what we’re hearing in the market.
And as you know, Mike, I mean, at the end, insulation played a critical role in what needs to be achieved in the world which is to reduce energy consumption. So of course, people preserve cash in this environment and people put on hold some of the projects. But if you need to replace your roof, you need to replace it, right? And you can hold out for one, two, three quarters but you cannot hold forever. So we believe this is a transitory theme. And if you look at North America, despite all the challenges, a region in North America year-to-date is growing volume, single low single digits but it’s still growing. So the impact that we saw in Q3 is mainly Europe and Asia.
Good morning, gentlemen. Thanks for taking my call. You actually just touched on it with the demand weakening in Europe and the Chinese markets. I know the North American markets seem to still have pretty strong demand. Are there any indicators that you’re keeping an eye on to forecast if or when any of this demand weakness does spread to the North American markets?
Yes. We’re obviously staying very close to our customers and watching and hearing what they’re saying about the installation contractors [indiscernible]. I think everyone’s been talking about the backlog of orders and projects. And in the first sign of weakness that we will see is when we hear that those back orders are starting to decline. So at this point in time, as Luis mentioned, our growth — our rigid North American volumes continue to grow in the small single digits. And I think we can anticipate that Q4 should be very similar. But too early to tell.