Stepan Reports Third Quarter Results

NORTHBROOK, Ill., Oct. 18, 2023 /PRNewswire/ -- Stepan Company (NYSE: SCL) today reported:

Third Quarter Highlights

• Reported net income was $12.6 million, or $0.55 per diluted share, versus a record $39.4 million, or $1.71 per diluted share, in the prior year. Adjusted net income* was $14.7 million, or $0.64 per diluted share, versus a record $46.3 million, or $2.01 per diluted share, in the prior year. Total Company sales volume decreased 9% versus the prior year.
• Surfactant operating income was $15.4 million versus $39.0 million in the prior year. This decrease was primarily due to a 7% decline in global sales volume and lower unit margins. Operating income improved slightly versus the $15.1 million reported for the second quarter of 2023 primarily due to new contracted volume for low 1,4 dioxane products. Demand within the agricultural end market remained low due to continued customer and channel inventory destocking.
• Polymer operating income was $21.8 million versus $31.9 million in the prior year. This decrease was primarily due to a 12% decline in global sales volume, including a 10% decline in Rigid Polyols. Operating income improved $5.5 million, or 34%, versus the second quarter of 2023 primarily due to a 7% increase in global Rigid Polyols demand.
• Specialty Product operating income was $2.4 million versus $9.7 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. Operating income was down $1.4 million from the second quarter of 2023 primarily due to order timing differences.
• The effect of foreign currency translation positively impacted net income by $0.7 million, or $0.03 per diluted share, versus the prior year.
• The Company increased its quarterly cash dividend in the fourth quarter of 2023 by $0.01 per share, or 3%, marking the 56th consecutive year that the Company has increased its cash dividend to stockholders.
• EBITDA** was $45.1 million during the third quarter of 2023 versus $76.4 million in the prior year. Adjusted EBITDA** was $48.0 million versus $85.5 million in the prior year. The declines in both EBITDA** and adjusted EBITDA** were primarily due to the 9% reduction in sales volume versus the prior year.
• The Company recorded a $4.1 million after-tax restructuring reserve, associated with the Company's previously announced voluntary early retirement program, in the third quarter of 2023. In addition, the Company is expanding its cost reduction activities and expects to realize $50.0 million of pre-tax cost savings in 2024 to help offset inflation and increased expenses related to the Company's new Pasadena alkoxylation investment.

YTD Highlights

• Reported net income was $41.4 million, or $1.80 per diluted share, for the first nine months of 2023 versus $136.3 million, or $5.90 per diluted share, in the prior year. Adjusted net income* was $43.2 million, or $1.88 per diluted share, versus $140.0 million, or $6.06 per diluted share, in the prior year. Total Company sales volume was down 14% compared to the first nine months of 2022.
• Cash generated from operations during the first nine months of 2023 was $104.9 million, up $29.9 million or 40% versus the first nine months of 2022. Free cash flow continues to be negative due to the Company's 2023 capital expenditures.

"The Company's third quarter results delivered gradual volume, adjusted EBITDA and adjusted net income growth versus the second quarter of 2023. The sequential volume growth was led by higher Rigid Polyols demand and new contracted volume for low 1,4 dioxane products in our Personal Care business. This was partially offset by continued customer and channel destocking within our agricultural business," said Scott Behrens, President and Chief Executive Officer. "Specific to the third quarter, Surfactant unit margins were lower versus the prior year due to less favorable product mix, high-cost raw material inventory carryover, and pricing pressure in Latin America from imported products. Specialty Product unit margins were significantly lower due to high-cost inventory and pricing pressure related to increased MCT import activity. Expenses were slightly lower versus prior year due to proactive headcount and discretionary expense controls implemented earlier in the year and lower incentive-based compensation accruals. We recorded a $5.5 million pre-tax restructuring reserve to manage the transition of employees participating in our voluntary early retirement program. We continue to make significant progress on our cash objectives, delivering another $55 million reduction in our inventory levels. Finally, we completed our low 1,4 dioxane capital investments and we are executing the last phase of our Pasadena, TX alkoxylation investment which is expected to be operational mid-year 2024."

Financial Summary

Summary of Third 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 third quarter reported net income includes $2.0 million of after-tax income versus $0.9 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 third quarter reported net income includes less than $0.1 million of after-tax income versus $0.1 million of after-tax income in the prior year.
• Business Restructuring: The 2023 third quarter reported net income includes $4.2 million of after-tax expense versus $0.1 million of after-tax expense in the prior year. The current year quarter includes a $4.1 million after-tax restructuring reserve associated with the Company's voluntary early retirement program. Both the current and prior year also include $0.1 million of after-tax decommissioning expense associated with the Company's Canadian plant closure.
• Environmental Remediation – The 2023 third quarter reported net income includes less than $0.1 million of after-tax expense versus $7.9 million of after-tax expense in the prior year.

Percentage Change in Net Sales

Net sales in the third quarter of 2023 decreased 22% year-over-year primarily due to lower selling prices and a 9% decrease in global sales volume. The lower selling prices were mainly attributable to the pass-through of lower raw material costs, less favorable product/customer mix and competitive pressures.

Segment Results

Total segment operating income for the third quarter of 2023 decreased $40.9 million, or 51%, versus the prior year quarter. Total segment operating income for the first nine months of 2023 was down $129.7 million, or 53%, versus the prior year.

• Surfactant net sales were $373.8 million for the quarter, a 21% decrease versus the prior year. Selling prices were down 17% primarily due to the pass-through of lower raw material costs, less favorable product/customer mix and competitive pricing pressures in Latin America. Sales volume decreased 7% year-over-year primarily due to overall lower demand, continued customer and channel inventory destocking within the agricultural end market, and the previously disclosed backward integration by one customer, associated with the low 1,4 dioxane transition, in the third quarter of 2022. Foreign currency translation positively impacted net sales by 3%. Surfactant operating income for the quarter decreased $23.6 million, or 61%, versus the prior year. This decrease was predominately due to the 7% decline in sales volume and lower unit margins. The lower unit margins reflect less favorable product mix, high-cost inventory carryover and increased competitive pricing pressures. Higher pre-operating expenses associated with the Company's new alkoxylation production facility that is being built in Pasadena, Texas were also a headwind during the quarter.
• Polymer net sales were $169.6 million for the quarter, a 21% decrease versus the prior year. Sales volume decreased 12% in the quarter, including a 10% decline in Rigid Polyols, due to lower demand within the Rigid Polyols, Specialty Polyols and Phthalic Anhydride businesses. The lower demand primarily reflects customer/channel inventory destocking and lower construction-related activities within the North America market. This was partially offset by volume growth in China. Selling prices decreased 12%, primarily due to the pass-through of lower raw material costs, and foreign currency translation positively impacted net sales by 3%. Polymer operating income decreased $10.1 million, or 32%, primarily due to the 12% decrease in global sales volume.
• Specialty Product net sales were $18.8 million for the quarter, a 36% decrease versus the prior year. Sales volume was down 28% versus prior year while operating income decreased $7.3 million, or 75%. 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.