Stepan Reports First Quarter Results

NORTHBROOK, Ill., April 25, 2023 /PRNewswire/ -- Stepan Company (NYSE: SCL) today reported:

First Quarter Highlights

• Reported net income was $16.1 million, or $0.70 per diluted share versus $44.8 million, or $1.93 per diluted share, in the prior year. Adjusted net income* was $16.4 million, or $0.71 per diluted share versus $40.7 million, or $1.76 per diluted share, in the prior year. Total Company sales volume decreased 14% versus the prior year.
• Surfactant operating income was $27.1 million versus $53.8 million in the prior year. This decrease was primarily due to a 13% decline in global sales volume that was partially offset by improved product and customer mix. The lower sales volume was mostly due to lower global commodity laundry demand, low 1,4 dioxane transition start-up delays and the previously mentioned backward integration by one customer in the third quarter of 2022. Volumes were also negatively impacted by lower demand within the North American Personal Care end market and continued customer inventory destocking. Higher global demand in the Agricultural end market partially offset the above.
• Polymer operating income was $10.0 million versus $14.1 million in the prior year. This decrease was primarily due to an 18% decline in global sales volume, including a 19% volume decline in Rigid Polyols and lower demand in the Specialty Polyols and Phthalic Anhydride businesses. The lower demand reflects continued customer inventory destocking and lower construction-related activities.
• Specialty Product operating income was $2.5 million versus $3.7 million in the prior year. This decrease was primarily attributable to lower sales volume and margins within the medium chain triglycerides (MCT) product line.
• The effect of foreign currency translation negatively impacted net income by $0.9 million, or $0.04 per diluted share, versus the prior year.
• Total Company EBITDA** was $48.3 million during the first quarter of 2023 versus $84.6 million in the prior year. Adjusted EBITDA** was $48.7 million versus $79.3 million in the prior year.

"The Company's first quarter financial results were significantly impacted by lower sales volume stemming from 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," said Scott Behrens, President and Chief Executive Officer. "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 cost 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 U.S., we kept cash expenses consistent year-over-year."     

Financial Summary

Summary of First Quarter Adjusted Net Income Items

Adjusted net income excludes non-operational deferred compensation income/expense, cash-settled SARs income/expense, certain environmental remediation costs and other significant and infrequent or non-recurring items.

• Deferred Compensation: The 2023 first quarter reported net income includes $0.1 million of after-tax income versus $3.9 million of after-tax income in the prior year.
• Cash Settled SARs: These management incentive instruments provide cash to participants equal to the appreciation on the price of specified shares of Company stock over a specified period of time. Because income or expense is recognized merely on the movement in the price of Company stock it has been excluded, similar to deferred compensation, to arrive at adjusted net income. The current year quarter includes less than $0.1 million of after-tax income versus $0.4 million of after-tax income in the prior year.
• Business Restructuring: The 2023 first quarter reported net income includes $0.1 million of after-tax decommissioning expense related to the Company's Canadian plant closure versus less than $0.1 million of after-tax expense in the prior year.
• Environmental Remediation – The first quarter of 2023 reported net income includes $0.3 million of after-tax expense versus $0.2 million of after-tax expense in the prior year.

Percentage Change in Net Sales

Net sales in the first quarter of 2023 decreased 4% year-over-year primarily due to a 14% decrease in global sales volume and the unfavorable impact of foreign currency translation.  Higher selling prices, that were mainly attributable to the pass-through of higher raw material costs and improved product and customer mix, partially offset the above.

Segment Results

Total segment operating income for the first quarter of 2023 decreased $32.0 million, or 45%, versus the prior year quarter.  

• Surfactant net sales were $467.8 million for the quarter, flat versus the prior year. Selling prices were up 14% primarily due to the pass-through of higher raw material and input costs as well as improved product and customer mix. Sales volume decreased 13% year-over-year primarily due to lower global commodity laundry demand, startup delays associated with the low 1,4 dioxane transition, lower demand within the North American Personal Care end market and continued customer and channel inventory destocking. Higher global demand for products sold into the Agricultural end market partially offset the above. The unfavorable impact of foreign currency translation negatively impacted net sales by 1%. Surfactant operating income for the quarter decreased $26.7 million versus the prior year primarily due to the 13% decline in sales volume and higher expenses associated with the Company's transition to low 1,4 dioxane capabilities.
• Polymer net sales were $161.1 million for the quarter, a 14% decrease versus the prior year. Sales volume decreased 18% in the quarter primarily due to a 19% decline in Rigid Polyols and lower demand in the Specialty Polyols and Phthalic Anhydride businesses. This was partially offset by strong double digit sales volume growth in China and mid-single digit growth in the 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 material raw material and input costs. The translation impact of a stronger U.S. dollar negatively impacted net sales by 4%. Polymer operating income decreased $4.1 million versus the prior year primarily due to the 18% decrease in global sales volume.

• Specialty Product net sales were $22.5 million for the quarter, a 13% increase versus the prior year. Sales volume was down 7% between years while operating income decreased $1.2 million. The decline in operating income was primarily attributable to lower sales volume and margins within the MCT product line.

• Consolidated EBITDA was $48.3 million for the quarter, a 43% decrease versus the prior year. Adjusted EBITDA was $48.7 million, a 38% decrease versus the prior year. The year-over-year decrease in both EBITDA and Adjusted EBITDA was primarily due to the decline in sales volume in the three business segments.

Corporate Expenses

• Corporate expenses, excluding deferred compensation, business restructuring and environmental remediation related costs, increased $1.1 million, or 7%, for the quarter.  This increase was primarily driven by inflation and the reallocation of some employee costs from the business units to corporate during the first quarter of 2023.  Total Company SG&A expenses, excluding deferred compensation, business restructuring and environmental remediation related costs were down 5% versus the prior year.      

Income Taxes

The Company's effective tax rate was 18.9% in the first quarter of 2023 versus 24.6% in the first quarter of 2022. This decrease was primarily attributable to more favorable tax benefits derived from stock-based compensation awards exercised or distributed in the first quarter of 2023 versus the first quarter of 2022.   

Shareholder Return

The Company paid $8.2 million of dividends to shareholders in the first quarter of 2023.  The Company did not purchase any Company stock in the first quarter of 2023 and has $125.1 million remaining under the share repurchase program authorized by its Board of Directors.  The Company has increased its dividend on the Company's common stock for 55 consecutive years.

Selected Balance Sheet Information

The Company's total debt increased by $123.9 million and cash decreased by $46.8 million versus December 31, 2022.  The increase in debt primarily reflects borrowings against the Company's revolving credit facility.  The decrease in cash primarily reflects higher working capital requirements and capital expenditures.  The Company's net debt level increased $170.7 million versus December 31, 2022 and the net debt ratio increased from 26% to 33% (Net Debt and Net Debt Ratio are non-GAAP measures).

The major working capital components were:

Capital spending during the first quarter of 2023 was $92.2 million versus $60.3 million in the prior year quarter.  The year-over-year increase is primarily due to increased expenditures in the U.S. for the advancement of the Company's new alkoxylation production facility in Pasadena, Texas, which is expected to provide flexible capacity of 75,000 metric tons per year, and new capability and capacity to produce ether sulfates that meet new regulatory limits on 1,4 dioxane.  For the full year, capital expenditures are expected to be in the range of $220 million to $240 million.

Outlook

"Looking forward, we believe second quarter volumes will remain depressed as markets continue to reconcile forward demand with inventory levels throughout the channel.  We   expect second half year over year volume growth driven by modest recovery in demand for Rigid Polyols, growth in Surfactant volumes associated with new contracted business   and a low comparable base," said Scott Behrens, President and Chief Executive Officer.  "We will continue to actively control costs and execute our productivity programs. Our balance sheet remains healthy and we are committed to advancing our strategic and innovation initiatives that are instrumental to our long-term growth."     

 Conference Call

Stepan Company will host a conference call to discuss its first quarter results at 8:00 a.m. ET (7:00 a.m. CT) on April 25, 2023. The call can be accessed by phone and webcast.  To access the call by phone, please click on this Registration Link, complete the form and you will be provided with dial in details and a PIN.  To avoid delays, we encourage participants to dial into the conference call ten minutes ahead of the scheduled start time.  The webcast can be accessed through the Investors/Conference Calls page at www.stepan.com. A webcast replay of the conference call will be available at the same location shortly after the call.

Supporting Slides

Slides supporting this press release will be made available at www.stepan.com through the Investors/Presentations page at approximately the same time as this press release is issued.

Corporate Profile

Stepan Company is a major manufacturer of specialty and intermediate chemicals used in a broad range of industries. Stepan is a leading merchant producer of surfactants, which are the key ingredients in consumer and industrial cleaning and disinfection compounds and in agricultural and oilfield solutions. The Company is also a leading supplier of polyurethane polyols used in the expanding thermal insulation market, and CASE (Coatings, Adhesives, Sealants, and Elastomers) industries.

Headquartered in Northbrook, Illinois, Stepan utilizes a network of modern production facilities located in North and South America, Europe and Asia.

The Company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol SCL. For more information about Stepan Company please visit the Company online at www.stepan.com

More information about Stepan's sustainability program can be found on the Sustainability page at www.stepan.com

Contact: Luis E. Rojo 847-446-7500

Certain information in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements about Stepan Company's plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, Stepan Company's actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "guidance," "predict," "potential," "continue," "likely," "will," "would," "should," "illustrative" and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by Stepan Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond Stepan Company's control, that could cause actual results to differ materially from the forward-looking statements contained in this news release. Such risks, uncertainties and other important factors include, among other factors, the risks, uncertainties and factors described in Stepan Company's Form 10-K, Form 10-Q and Form 8-K reports and exhibits to those reports, and include (but are not limited to) risks and uncertainties related to accidents, unplanned production shutdowns or disruptions in manufacturing facilities; reduced demand due to customer product reformulations or new technologies; our inability to successfully develop or introduce new products; compliance with laws; our ability to identify suitable acquisition candidates and successfully complete and integrate acquisitions; global competition; volatility of raw material and energy costs and supply; disruptions in transportation or significant changes in transportation costs; downturns in certain industries and general economic downturns; international business risks, including currency exchange rate fluctuations, legal restrictions and taxes; unfavorable resolution of litigation against us; maintaining and protecting intellectual property rights; our ability to access capital markets; global political, military, security or other instability; costs related to expansion or other capital projects; interruption or breaches of information technology systems; our ability to retain executive management and key personnel; and our debt covenants.

These forward-looking statements are made only as of the date hereof, and Stepan Company undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Tables follow

The Company believes that certain measures that are not in accordance with generally accepted accounting principles (GAAP), when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company's operating performance and provide better clarity on the impact of non-operational items.  Internally, the Company uses this non-GAAP information as an indicator of business performance and evaluates management's effectiveness with specific reference to these indicators.  These measures should be considered in addition to, and are neither a substitute for, nor superior to, measures of financial performance prepared in accordance with GAAP.

The deferred compensation income statement impact is summarized below:

SOURCE Stepan Company