Stepan Company (NYSE:SCL) Q2 2023 Earnings Call Transcript
Stepan Company (NYSE:SCL) Q2 2023 Earnings Call Transcript July 26, 2023
Stepan Company beats earnings expectations. Reported EPS is $2.3, expectations were $1.17.
Operator: Good day, and thank you for standing by, and welcome to the Q2 2023 Stepan Company Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's call, Luis Rojo, CFO. Please go ahead.
Luis Rojo: Good morning, and thank you for joining Stepan Company's Second Quarter 2023 Financial Review. Before we begin, please note that information in this conference call contain forward-looking statements. which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including, but not limited to, prospects for our foreign operations, global and regional economic conditions and factors detailed in our Securities and Exchange Commission filings. Whether you are joining us online or over the phone, we encourage you to review the investor slide presentation, which we have made available at www.stepan.com on the divestor section of our website. We make these slides available at approximately the same time as when the earnings release is issued, and we hope that you find the information perspective helpful.
With that, I would like to turn the call over to Mr. Scott Behrens, our President and Chief Executive Officer.
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. During the second quarter of 2023, the company paid $8.2 million in dividends to shareholders and $16.3 million during the first 6 months of 2023.
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The company did not repurchase any company stock during the first half of 2023 and has a $125 million remaining under the share repurchase program authorized by its Board of Directors. Yesterday, our Board of Directors declared a quarterly cash dividend on Stepan's common stock of $0.365 per share, payable on September 15, 2023. Stepan has paid an increased its dividend for 55 consecutive years. Despite the challenging current macro environment and our reduced second quarter earnings, we remain confident in the strength and diversity of our business and its ability to generate cash that will allow us to continue to invest in our business and return cash to our shareholders. Luis will now share some details about our first quarter results.
Luis Rojo: Thank you, Scott. My comments will generally follow the slide presentation. Let's start with Slide 4 to recap the quarter. Adjusted net income was $12.1 million or $0.53 per diluted share, versus $53 million or $2.30 per diluted share in the prior year. Because adjusted net income is a non-GAAP measure, we provide full reconciliations to the comparable GAAP measures. And this can be found in Appendix 2 of the presentation and table 2 of the press release. Specifically, the adjusted net income for the first quarter excludes deferred compensation income of $0.7 million compared to an expense of $0.5 million in the prior year. It also excludes minor business restructuring expenses and environmental remediation costs.
The deferred compensation figures represent the net income related to the company's deferred compensation plan as well as cash-settled stock appreciation rights for our employees. Because if liabilities change with the movement in the stock price, we exclude these items from operational discussion. Slide 5 shows the total company net income bridge for the second quarter compared to last year's second quarter, and breaks down the decrease in adjusted net income. Because this is net income, the figure is not here and on an after-tax basis. We will cover [indiscernible] in more detail, but to summarize, we experienced lower operating income in all segments driven by lower volumes. The company effective tax rate was 20% in the first half of 2023 versus 25% in the first half of 2022.
This decrease was primarily due to more favorable tax benefits derived from stock-based compensation awards exercised or distributed in the first half of 2023 versus the first half of 2022. Let's move to Slide 6. Slide 6 focused on Surfactant segment results for the quarter. Surfactant net sales were $392 million for the quarter, a 19% decrease versus the prior year. Selling prices were down 5% and volume decreased 15% year-over-year. The reduction in volume was 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 Dx in transition. Foreign currency translation positively impacted net sales by 1%. Surfactant operating income for the quarter decreased $33 million versus the prior year.
Most of this decrease is due to a 15% decline in volume. Unit margins were slightly lower due to less favorable product mix high-cost inventory carryover and increased competitive pressures in Latin America. Higher expenses associated with the company transition to low 1,4 Dx in [indiscernible] and preoperating expenses in our Pasadena site were also headwinds during the quarter. Operating income declined in all Surfactants regions, primarily due to the lower overall demand mentioned before as well as pressure from imports in Latin America. 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. Finally, Specialty Product net sales were $23.8 million for the quarter, a 14% decrease versus the prior year. Volume was down 16% between years, while operating income decreased $6 million versus a record second quarter in 2022.
The decline in operating income was primarily due to high cost inventory carryover and pricing pressures. Turning to Slide 8. Also our balance sheet remains healthy. We have increased our efforts to lowering working capital and reducing capital spending to adapt to the current business environment. For the second quarter, cash from operations was a healthy $108 million, and we deployed $103 million against CapEx investments, debt payments and dividends. Our net debt improved from $584 million in the first quarter of 2023 to $549 million this quarter as we continue to deliver a strong cash generation. Now on Slide 9 and 10, Scott will update you on our strategic and cap -- strategic priorities and capital investments.
Scott Behrens: Thanks, Luis. I will focus my comments on our cost and cash management initiatives and on the progress of our major capital investments. In regards to our 2023 cash expenses, we continue targeting to hold full year cash expenses flat or down versus prior year despite continued pressure from elevated cost inflation. Based on the disappointing second quarter financial results, we are taking further actions to control costs and improve cash flow, including a voluntary early retirement program for eligible employees at our corporate headquarters and Global Technology Center, which are both located here in the Chicago area. This program should help position us to deliver improved earnings in 2024. We expect to take a restructuring charge in the third quarter.
Our second half capital spending should decline by $70 million to $80 million compared to the first half of the year as we finish our 1,4-dioxane projects in the coming weeks and begin to wind down spending on Pasadena sequentially over the remaining quarters. We also expect to reduce inventories by $40 million in the second half, freeing up additional cash. 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.
As you know, we are increasing North American capability and capacity to produce ether sulfates that meet new regulatory limits on 1,4-dioxane. The new assets in our Millsdale facility are now mechanically complete and are being commissioned this quarter. New contracted low 1,4-dioxane volumes have already started and should drive volume growth in the second half of 2023. Once completed, Stepan will have the largest installed low 1,4-dioxane production capacity serving the North American merchant market, which will enable Stepan to maintain and grow our North American sulfonation business in 2024 and beyond. Looking forward, we continue to believe second half of the year volume and margins will incrementally improve versus the first half of 2023, driven by the continued gradual recovery in rigid polyol demand growth in Surfactant volumes associated with new contracted business and sequentially lower raw material costs.
While first half financial results were disappointing, our anticipated lower second half CapEx spending and an improved working capital position should benefit our balance sheet and free up cash, allowing us to continue to invest and advance our long-term strategic growth and innovation initiatives. We expect additional actions to control costs, including today's announced voluntary early retirement program will benefit our earnings in 2024. While the current market environment continues to present near-term challenges, we believe second half adjusted earnings will improve over the first half of 2023. This concludes our prepared remarks. At this time, we'd like to turn the call over for questions. Justin, please review the instructions for the question portion of today's call.
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