Stepan Reports Second Quarter Results

NORTHBROOK, Ill., July 26, 2023 /PRNewswire/ -- Stepan Company (NYSE: SCL) today reported:

Second Quarter Highlights

• Reported net income was $12.7 million, or $0.55 per diluted share, versus a record $52.1 million, or $2.26 per diluted share, in the prior year. Adjusted net income* was $12.1 million, or $0.53 per diluted share, versus $53.0 million, or $2.30 per diluted share, in the prior year. The decline in both reported and adjusted net income was predominately due to a 19% reduction in sales volume versus the prior year.
• Surfactant operating income was $15.1 million versus $48.2 million in the prior year. This decrease was primarily due to a 15% decline in global sales volume. The decline in sales volume was primarily due to overall lower demand, customer and channel inventory destocking, and the previously disclosed backward integration by one customer, associated with the low 1,4 dioxane transition, in the third quarter of 2022. In addition, unit margins were slightly lower due to less favorable product mix, high-cost inventory carryover and increased competitive pricing pressures in Latin America.
• Polymer operating income was $16.3 million versus $33.9 million in the prior year. This decrease was primarily due to a 29% decline in global sales volume, including a 28% decline in Rigid Polyols. The lower demand reflects continued customer and channel inventory destocking and reduced construction-related activities. Global Rigid Polyols volume improved sequentially each month during the second quarter of 2023 and was up 9% versus the first quarter of 2023.
• 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 (MCT) product line. The lower unit margins were primarily due to high-cost inventory carryover.
• The effect of foreign currency translation had a negligible impact on net income and earnings per diluted share, versus the prior year.
• EBITDA** was $46.7 million during the second quarter of 2023 versus $95.5 million in the prior year and $48.3 million in the first quarter of 2023. Adjusted EBITDA** was $45.8 million versus $96.7 million in the prior year and $48.7 million in the first quarter of 2023. The decline in both reported and adjusted EBITDA** was primarily due to a 19% reduction in sales volume versus the prior year.

First Half Highlights

• Reported net income was $28.8 million, or $1.25 per diluted share, versus $96.9 million, or $4.19 per diluted share, in the prior year. Adjusted net income* was $28.5 million, or $1.24 per diluted share, versus $93.7 million, or $4.05 per diluted share, in the prior year. Total Company sales volume was down 17% compared to the first six months of 2022.

"The Company's second quarter and first half of the year financial results were significantly lower than the record quarterly results in both the first and second quarters of 2022. Lower sales volume due to demand softness across most of our markets, continued inventory destocking and the backward integration of one customer associated with the low 1,4 dioxane transition drove the 17% sales volume reduction in the first half of the year," said Scott Behrens, President and Chief Executive Officer. "Specific to the second quarter, Surfactant and Polymer unit margins were only slightly lower versus the prior year due to less favorable product mix. Specialty Product unit margins were significantly lower due to high-cost inventory and pricing pressure related to increased imports of MCTs into certain market segments. Rigid Polyol volumes gradually improved throughout the quarter. Surfactant volumes were negatively impacted by unexpected destocking activity within our Agricultural business. Cash expenses were slightly lower versus prior year due to proactive headcount and discretionary expense controls implemented earlier in the year and lower accruals for incentive-based compensation."

Financial Summary

Summary of Second 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 second quarter reported net income includes $0.7 million of after-tax income versus $0.5 million of after-tax expense 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 second quarter includes less than $0.1 million of after-tax income versus $0.1 million of after-tax expense in the prior year.
• Business Restructuring: The 2023 second quarter reported net income includes less than $0.1 million of after-tax decommissioning expense related to the Company's Canadian plant closure versus $0.1 million of after-tax expense in the prior year.
• Environmental Remediation – The second quarter of 2023 reported net income includes less than $0.1 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 second quarter of 2023 decreased 23% year-over-year primarily due to a 19% decrease in global sales volume. Lower selling prices negatively impacted net sales by 4% and largely reflect less favorable product mix and competitive pressures.

Segment Results

Total segment operating income for the second quarter of 2023 decreased $56.8 million, or 62%, versus the prior year quarter. Total segment operating income in the first half of 2023 was down $88.8 million, or 54%, versus the prior year.

• Surfactant net sales were $391.7 million for the quarter, a 19% decrease versus the prior year. Sales volume decreased 15% year-over-year primarily due to overall lower demand, customer and channel inventory destocking, and the previously disclosed backward integration by one customer, associated with the low 1,4 dioxane transition, in the third quarter of 2022. Selling prices were down 5% and foreign currency translation positively impacted net sales by 1%. Surfactant operating income for the quarter decreased $33.1 million, or 69%, versus the prior year. This decrease is predominately due to the 15% decline in sales volume. Additionally, unit margins were slightly lower due to less favorable product mix, high-cost inventory carryover and increased competitive pricing pressures in Latin America. Higher expenses associated with the Company's transition to low 1,4 dioxane capabilities and pre-operating expenses associated with the Company's new alkoxylation production facility that is being built in Pasadena, Texas were also headwinds during the quarter.
• Polymer net sales were $164.5 million for the quarter, a 31% decrease versus the prior year. Sales volume decreased 29% in the quarter primarily due to a 28% decline in Rigid Polyols and lower demand in the Specialty Polyols and Phthalic Anhydride businesses. This was partially offset by volume growth in China. The lower demand reflects 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, or 52%, primarily due to the 29% decrease in global sales volume.
• Specialty Product net sales were $23.8 million for the quarter, a 14% decrease versus the prior year. Sales volume was down 16% versus prior year while operating income decreased $6.1 million, or 62%. The decline in operating income was primarily attributable to lower unit margins and sales volume within the MCT product line. The lower unit margins were primarily due to high-cost inventory carryover.