Stepan Company (SCL) Q2 2023 Earnings Call Transcript

Jul. 26, 2023 2:04 PM ETStepan Company (SCL)

Q2: 2023-07-26 Earnings Summary

EPS of $0.53 misses by $0.64 | Revenue of $579.98M (-22.84% Y/Y) misses by $89.88M

Stepan Company (NYSE:SCL) Q2 2023 Earnings Conference Call July 26, 2023 9:00 AM ET

Company Participants

Luis Rojo – VP & CFO

Scott Behrens – CEO, President & Director

Scott Behrens

Good morning, and thank you for joining us today to discuss our second quarter results. I plan to share highlights from our second quarter performance. I will also share updates on our key strategic priorities while Luis will provide additional details on our financial results. The company reported second quarter adjusted net income of $12.1 million. Earnings were significantly impacted by a 19% decline in sales volume versus the all-time record prior year second quarter due to continued demand softness across most of our markets and continued inventory destocking in certain market channels.

In the second quarter, margins in our Surfactant and Polymer segments were only slightly lower versus prior year as a result of less favorable mix, while unit margins for Specialty Products were significantly lower versus prior year due to high-cost inventory and pricing pressure. Gradual volume improvement throughout the quarter within our rigid polyol business was more than offset by destocking activity within our agricultural business. Cash expenses were slightly lower versus prior year due to proactive head count and discretionary expense controls implemented earlier in the year and lower accruals for incentive-based compensation.

For the quarter, adjusted EBITDA was $45.8 million versus $96.7 million in the prior year quarter, primarily driven by the decline in sales volume. Adjusted EBITDA in the second quarter of 2023 was slightly lower than the first quarter of 2023. Second quarter Surfactant operating income was $15.1 million versus $48.2 million in the prior year quarter, primarily due to a 15% decline in global sales volume. In addition, Unit margins were slightly lower due to less favorable product mix, high cost inventory carryover and increased competitive pricing pressure in Latin America.

Polymer operating income was $16.3 million, a decrease of $17.6 million versus the prior year. This decrease was primarily due to a 29% decline in global sales volume, including a 28% volume decline in Rigid Polyols. Specialty Product operating income was $3.8 million versus $9.9 million in the prior year. This decrease was primarily attributable to lower unit margins and sales volume within the medium chain triglycerides product line versus a record prior year.

Luis Rojo

Now turning to Polymers on Slide 7. Net sales were $164.5 million for the quarter, a 31% decrease versus the prior year. Volume decreased 29%, primarily due to a 28% volume decline in region volumes and lower demand in the specialty polyol and businesses. This was partially offset by volume growth in China. The lower demand reflect customer and channel inventory destocking and lower construction-related activities. Selling prices decreased 3% and foreign currency translation positively impacted net sales by 1%. Polymer operating income decreased $17.6 million versus prior year, primarily due to the 29% decrease in global volume. North America and Europe results were both impacted by lower volumes. Asia results improved on increased demand following the reopening of China.

Scott Behrens

Moving to Slide 10, Construction on our new alkoxylation production facility in Pasadena, Texas is approximately 35% complete and has surpassed 500,000 construction hours without an injury. The new estimated capital investment now stands at $265 million. We expect the Pasadena plant to be 90% complete by year-end and to start up in mid-2024. The underlying of consolation business that supports the Pasadena investment continued its strong double-digit volume growth in the first half of the year and at attractive margins.

Scott Behrens

Yes. Thanks, David. With regards to destocking, so the destocking obviously started to happen in Q1, definitely in the polyol side of our business for sure and in, I would say, all segments of our consumer products business. I think when you look back and try to appreciate how much inventory was stuffed throughout the channels. I don’t think anyone had a really good handle on it. What we can say going forward is in the rigid polyol business, we think that the destocking is predominantly behind us, and we’re now starting to get into a normal demand pattern for the second half of the year. I would say the same thing is true in consumer products. The destocking probably bottomed out in late April, May, and we’re now going to be entering a normal stabilized volume pattern going forward.

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